$40 Barrel of Oil for Christmas

Stuck for Christmas gift ideas? Why not try a barrel of oil? You can get one for around US$40 these days. That’s 54% lower than this time last year and 72% below the price on July 14th ($145.16).

True, a big barrel of West Texas Intermediate crude oil might be hard to fit under a Christmas tree. And it’s probably a fire hazard. But it also makes an excellent end table or lectern. However, we would wait for the post-Christmas sale, or maybe even until 2009, for a lower price.

Speaking of Christmas, just a reminder that our third annual Doomer’s Ball is tomorrow night. The location is BLVD Bar, located at 6 Queensbridge Square on Southbank in Melbourne, from 6:30 p.m. until later. There will signs directing to the right room and even be a red carpet, we hear. If you’ve RSVPd, there will be a check in desk where you can pick up a name badge at your ticket for a free drink . See you then!

Today’s AFR reports that Australia has a funding gap. The credit crisis is causing foreign banks to pull up stakes, pack up their cash, and head back to wherever they’ve come from. The AFR reckons about $50 billion in lending will have to be replaced by Aussie banks.

Those banks, by the way, may not be so keen to make new loans. ANZ boss Mike Smith was in Melbourne Friday swinging the axe. Eight hundred heads toppled from their shoulders by the time he was done. If the banks do as good a job deleveraging their balance sheets, things might start to look better in 2009.

You’d expect job losses and a bad year for stocks to impact consumer confidence and spending habits. You’d be right. Australia had a $20 billion current account deficit in March, according to David Uren in today’s Australian. That was seven percent of Aussie GDP and pretty remarkable for a country in the middle of an export boom.

Now, though, consumers are rolling back their spending ways. The weaker Aussie dollar makes imports more expensive. The current account deficit has halved to 3.2% of GDP. This probably isn’t great news for retailers. But if household’s rebuild their balance sheets on savings, it’s not a bad development.

Over the long run, in fact, an increase in the savings rate increases the amount of credit banks can lend to businesses. Household savings are the source of bank deposits. And in a fractional reserve banking system, every new dollar deposited is multiplied into ten dollars that can be lent. If the banks are lending, that is.

Christmas has come early for Leighton Holdings (ASX:LEI). Dubai’s Department of Civil Aviation awarded Leighton’s Middle East operation a $1.3 billion airport contract. At $21.31, Leighton is not selling for much above its 52-week low of $18.68. It trades at just 10 times earnings. Is it a buy?

That depends on whether you think countries like Dubai are going to keep building and spending. Dubai has the money, generated from the oil trade. And it’s in the middle of an ambitious project to turn oil money into the capital stock of a new economy, via tourism, finance, and trade. But it could also be just another example of the credit bubble.

Take away Western demand fuelled by credit, and the world needs less oil. Ironically, this actually accelerates the rate of depletion in global oil fields. How? When a good falls in price, people tend to use more of it. The cheaper it is, the more you use it. But wait. There’s more.

While cheaper oil prices in 2009 accelerate the depletion rate by encouraging more use (and lulling us all into a false sense of oil security) they also discourage smaller firms from going out and finding more. The majors are always looking for oil. They have to constantly replenish reserves to match production, or the stock price falls. But what about all the other searchers and explorers. Will they keep looking for oil with the price at $40?

In America, Barrack Obama is already busy spending money America doesn’t have. And he hasn’t even officially taken office yet. Impressive. Obama is dusting off construction plans for bridges, highways, and schools that he says are “shovel ready.” That means all the blue prints and plans are drawn up. They just need men, machines, and money.

America doesn’t have the money. But that has never stopped anyone with a can-do attitude. Obama says we can’t worry about the deficit in the short term. Right. It doesn’t look like anyone has been worried about the deficit in America for a long time.

Dig a hole. Fill it up. We’re not sure where we heard that. Maybe it’s a Buddhist way of dealing with stress, and realising…something. But we get the feeling a lot of holes are about to be dug across the world. And most of it will be paid for with borrowed money.

But who will be doing the lending? So many new government bonds are going to hit the market in the next year from the U.K. and the U.S. that you wonder if the world’s creditor nations aren’t starting to get a bit nervous. What happens if they balk? Interest rates should rise.

That’s not happening yet. Just the opposite. “Yields on two-, 10- and 30-year securities fell to the lowest levels since the Treasury began regular sales of the debt,” reports Bloomberg. And get this. The yield on three month T-bills is a sparkling 0.01%.

Hear that sound? It’s the sound of the bond bubble stretching to historic levels. Cover your ears.

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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7 Comments on "$40 Barrel of Oil for Christmas"

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Graham Smith

Why do Leighton trumpet to the world that they win these $2 billion projects when in actual fact their share is only one sixth of that (at $360 million). Are they trying to convince the world that they are going to survive the economic disaster that lies ahead for the construction industry here in Australia? With the government entirely focused on saving the housing market there will simply be no work for these guys. You might as well blow your own trumpet if no-one else does!


…well…move over irving fisher, obama is off the shelf and in the store…bpp+mmm=bhs…the obama equation of change….that’s blueprints and plans plus men machines and mulah equals bridges highways and schools….


“cover your ears” is a beauty. The game of rounders continues with monetised inflation surely the final nail when the marauding mass finally get a lever on the fact that expanded western CAD country balance sheet = money printing. I’m not even convinced that physical gold is safe.

Anthony Teamson

What happens when the bond bubble bursts? I am serious.

Coffee Addict
Bond bubble burst – What happens: Anthony, I’m not an expert but here are some tangents that others may wish to add to or disagree with: 1. Commercial paper default rates are quadrupling every year. The ability of companies to roll over their bonds without a high risk premium is diminishing. In any case will many of the firms that issue paper able to pay the interest premiums ? 2. Interest rate risk (on both government and corporate paper). The easy money policy is (I think) viewed by Ben Bernanke and others as a temporary fix at best. There is… Read more »
Anthony Teamson

Thank you Coffee Addict. I really do not know what are the the implications of a major corrections int he bond market. Your kind response gives me an avenue of investigation. If you you have any other suggestions, and the time to share them, I will be much obliged.

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