Oil Datapoints of the Day

Krishna Guha:

At today's prices the value of oil in the ground exceeds the combined value of all the world's equity and debt markets.

Oil-importing nations are paying oil-exporting nations roughly $1,500bn per annum for oil - about 2.5 per cent of global gross domestic product - by some measures the biggest income transfer in history.

The whole article is excellent, and required reading for anybody wanting to scare up opinion against sovereign wealth funds. Yes, the savings rates of oil exporters might start falling as their capacity for domestic investment rises. But there's no doubt that their savings in absolute terms will rise impressively for the foreseeable future. If you think the SWFs are big now, just wait another decade: they'll have major geopolitical importance then.

The last two waves of petrodollar investment both turned very sour in the end, and I can't say that the medium-term outlook is any better. The magic of capital markets is that they're meant to somehow take capital from investors and funnel it to where it can be put to best use in the real world. But with banks deleveraging and investors staying risk averse, it's not easy to see that happening with any elegance in the future.

Over the next few years, oil will be converted into stocks and bonds at an astonishing pace. That trade has never worked out well in the past; what hope is there that it will work out well in the future?

Comments

[dlaw:]

Important commentary and thanks so much for pointing out the article.

I would put a slightly different spin on the problem: These oil numbers point out that the world has still not come up with a generalized capital markets approach that works in fact, rather than in theory.

I think what we're seeing is that there's an artificial barrier between the nation-state and the capital markets. The answer is not, as some anarcho-capitalists would suggest, to destroy the nation state. Neither is it to destroy the capital markets.

The answer is to find an accommodation between the two institutions and create institutions that operate at a new level.

The key is for people not to forget no resource can find value absent economic flow and activity. The oil-rich countries are islands, in a sense, but if they come to believe that floating on a sea of petroleum and floating on a sea of petro-dollars is the same thing, they are doomed. Dollars (euros, yen) represent collective effort. Oil is just another useful mineral, like uranium.

How these things are employed is the most important question.

2008 Aug 11 01:53 PM

[john s. gordon:]

as the arab said, 'my father rode a camel, i drive a car, my son flies a jet airplane, my grandson will ride a camel'. sic transit gloria mundi.

2008 Aug 12 08:46 AM