'Food and oil, I'm afraid, go hand in hand'
- Deutsche Bank analyst
There's been a lot of stale argument recently about oil – is it running out? Are we approaching/at/passed Peak Oil (the point when global oil production goes into irrevocable decline)? Business, unsurprisingly, isn't waiting for the answer; it's working out what will happen next.
Take the recent report from Deutsche Bank, entitled 'The Peak Oil Market: Price Dynamics at the End of the Oil Age'. This describes a world where the effect of failing global reserves is compounded by incoherent politics. If the US Government was honest about the cost of oil, for example, it would slap another 50c on a gallon of gasoline to pay the cost of the war in Iraq. Ludicrously, as global oil supplies dwindle, the increasingly precious part that remains is concentrated in the hands of those who give it away to their citizens for almost nothing – Saudi Arabia, Venezuala, Iran, Iraq.
Governments should be planning how best to manage the limited supply of oil sensibly, for the long-term, the bankers write:
'We believe, based on the history of the past decades, years, and months, that they will do the exact opposite.'
As a result, oil demand – and price – will continue to spiral upwards to a peak in 2016, when a barrel will cost about $175 (it is just under $80 today). At that point – at that price – our addiction will be broken as people turn instead to cheaper alternatives already gaining ground today, natural gas and the electric car.
But, for all its talk of price, the report fails to mention the cost. As the Deutsche Banker quoted above (he asked not to be named) points out, this is measured in hungry mouths, for food and oil go hand in hand. Take a look at the graphs below; one shows the global price of oil, the other the global price of food. Both go up. Last week's British inflation figures – a measure of increasing prices, including that of food – were up, sharply, driven by the increasing price of oil. Remember the food riots of 2007-8? Between now and 2016, expect more of the same.
Watching the builders
Every businessman has a pet indicator they claim gives them the inside edge on what is happening to the recession. Some watch carpet sales, others booze sold by supermarkets (people staying in for a cheaper night), still others watch Butlins (people taking cheaper holidays). Inspired by one City contact who counts the skips on his street (people splashing out on home renovations), I've been watching builders. We're buying a house. The extension, we're told, is substandard. Needs knocking down. The builders are licking their lips in anticipation. When can they start? Any time you like, guv. Business is patchy.
The same is true across the industry. Wolseley, the Midlands-based builders' merchant and world's biggest supplier of plumbing and heating products, says profit was down 45 per cent in the three months to July. The company has cut 30,000 staff and expects hard times ahead. 'We do expect that to get worse before it gets better,' said chief financial officer, Steve Webster.
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