Thursday, August 05, 2004

Oil: Ground truth from Iraq,

The "facts on the ground" always outweigh propaganda and spin. It is possible for persons caught up in local struggles to miss the big picture, however when you get many samplings of information and they all start to tell a story ... well then only a fool ignores that. The CSM has been doing some outstanding reporting lately, some of it like it's daily security briefing here that notes how the attitudes of those who are actually there in Iraq shift.

Even journalists who believe that the situation in Iraq is still promising have written that the US media have greatly underestimated just how damaging the insurgency has been to the coalition's efforts to rebuild Iraq. Ken Dilanian of the Philadelphia Inquirer wrote in April that the media was "underplaying the good things happening in Iraq, and were missing the potential for a turnaround."

In a column this week, after his second visit to Iraq, he says that he still believes the media underplays good things in Iraq but that "the situation had deteriorated so dramatically that a lot of those good things have become irrelevant.

The reason why the oldman is mentioning this is that this kind of need for "facts on the ground" extends to economic analysis too. As stated many economists and analysts still persist as treating the oil market recent maneuvers as temporary abberations.
Some analysts say higher gasoline prices have already affected annual economic growth - by perhaps 0.8 percentage points.

"In terms of the little guy, already fuel prices have affected the airlines, trucking companies, and orange-juice manufacturers, for instance - and that is passed on to the consumer," says Amy Jaffe, the associate director of the energy program at Rice University in Houston. To be sure, high oil prices affect the economy much less now than historically because the economy is much more service-oriented, she says.

For all the new uncertainty about the economic recovery, Costello says he expects "pretty much normal" GDP growth next year of 3.2 percent, down from 4.6 percent this year.

John Felmy, chief economist for the American Petroleum Institute in Washington, disagrees. "The combination of high petroleum and high natural gas prices is a real drag on the economy," he says. "Many economists speculate that a large share of [slower GDP growth expected for next year] is due to ... energy prices."

Nearing a top?

One positive sign: prices retreated a bit late Wednesday. "That is a big deal, because I really think we are looking at the top here," says Sarah Emerson of Energy Security Analysis in Wakefield, Mass. "I think this is the worst of the crisis."

Meanwhile, demand is not expected to slow down.

Ms. Jaffe says gasoline price spikes usually don't affect the economy for at least two years. She does, however, believe that energy will be part of the presidential debate. "We still don't have an energy policy. And while there is a lot of blame to go around for that, the fact of the matter is Bush was president."

The simple fact is that we may reach a temporary high, and then see oil pull back. But before long it'll be back up. Why? It doesn't take a genius to see that Iraq is on the verge of a major political and military destabilization. Iraqi oil output will probably decline precipitiously. It doesn't take a person aware of how Sistani has heart trouble or one overly impressed by Sadr to conclude this either. It's not any one event. Events in general are trending toward this, each little spike of trouble another nail on the coffin and undermining our position there.

The same psychological reasons why some people will deny this is happening to a stock they've bought, and will later ride all the way down to bankruptcy, is the same reason that things in Iraq will be ignored until they collapse. And trust me they are closer to collapsing than anyone realizes. Part of the reason why I'm writing about this is that I have a personal hatred of the bungling and snake-oil salesmen in life whether on Wall Street or in the White House or in the Press who take for a sucker's ride ordinary people with their confabulation and lies.

Iraq is not doomed for sure, but barring a miracle it may be on the verge of a major destabilizing episode and when it restabilizes even if it doesn't fall completely apart will be nastier, more dangerous, and less stable than before. This fact has not been factored into the oil markets yet. If it had, we'd be seeing $50 per barrell oil already. And after probably a brief pull back to may $39 or $37 we probably will see it come back up. If there's time for it to go down that far.

Iraq is getting pretty wobbly as we speak.

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