From Global “Oil Shock” Rattles World Stock Markets :
The price of crude oil was trading near $70 a barrel as recently as last August, when the Fed suddenly jolted the markets, by lowering its discount rate to 5.75% on Aug 17th, timed to squeeze short sellers in the stock market, on options expiration day. The Fed’s abrupt shift towards easy money fueled a 1,500-point rally for the Dow Jones Industrials over the next two months to a record high of 14,100.
But the stock market’s “irrational exuberance” didn’t last long, once the unintended consequences of the Fed’s rate cuts, a - Global “Oil Shock” – began to settle in. In trying to rescue the Dow Jones Industrials from the claws of a grizzly bear market, the Fed has sacrificed the US dollar, and in turn, ignited a powerful surge in the price of crude oil to $110 /barrel. And most US recessions in the post-World War II era were preceded by sudden spikes in oil prices.
On Feb 15th, Fed chief Ben Bernanke played down the threat of spiraling energy and food prices, saying “inflation expectations remain reasonably well anchored,” then signaled another rate cut in March, as an “insurance policy to head off an economic recession.” Since then, the price of crude oil has surged $17 /barrel, and is wrecking havoc on Wall Street and other major stock markets around the globe.
The price of crude oil was trading near $70 a barrel as recently as last August, when the Fed suddenly jolted the markets, by lowering its discount rate to 5.75% on Aug 17th, timed to squeeze short sellers in the stock market, on options expiration day. The Fed’s abrupt shift towards easy money fueled a 1,500-point rally for the Dow Jones Industrials over the next two months to a record high of 14,100.
But the stock market’s “irrational exuberance” didn’t last long, once the unintended consequences of the Fed’s rate cuts, a - Global “Oil Shock” – began to settle in. In trying to rescue the Dow Jones Industrials from the claws of a grizzly bear market, the Fed has sacrificed the US dollar, and in turn, ignited a powerful surge in the price of crude oil to $110 /barrel. And most US recessions in the post-World War II era were preceded by sudden spikes in oil prices.
On Feb 15th, Fed chief Ben Bernanke played down the threat of spiraling energy and food prices, saying “inflation expectations remain reasonably well anchored,” then signaled another rate cut in March, as an “insurance policy to head off an economic recession.” Since then, the price of crude oil has surged $17 /barrel, and is wrecking havoc on Wall Street and other major stock markets around the globe.
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The “Peak Oil” theory refers to the inevitability of a peak in global oil production. Oil is a finite, non-renewable resource, and once half of the original reserves are depleted, oil production is likely to stop growing and then begin a terminal decline. Of the 65 largest oil producing countries in the world, 54 are past their “Peak Oil” production and are now in decline, including the USA, down 11% since 1971, and the UK’s North Sea down 27% since peaking in 1999.
Other big oil producers in decline include Australia, down 26% since 2001, and Norway, down 13% since 2001. The Cantarell oil field, Mexico’s largest has also peaked with its output falling to 1.7 million bpd in 2007, down from its peak output of 2.1 million bpd. Thus, global oil demand is expected to exceed supply in the second half of this year, and the oil deficit will only grow wider in 2009, unless the global economy sinks into a sharp recession.
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