The past weekend has seen the rebellion in Libya continue and it is now showing signs of durability on both sides. The autocrat Colonel Gaddafi refuses to step down and the rebels resist his forces making many wonder how long this situation may persist. Indeed as there are signs of unrest in Arabia too, the oil price has resumed its upward climb and is now just under US $117 for a barrel of Brent crude and the price of a barrel of West Texas Intermediate is catching up as it now stands at US $ 106 per barrel. This got me thinking as to how far oil has risen and what the impact will be in different countries/currencies.
The rise in the oil price since the beginning of 2009 in different currencies
The reason why I have looked at this is the fact that the price of oil is in US dollars so those who do not have it as their currency have to use their own currency to purchase it.
Back at the opening of 2009 the price of a barrel of Brent crude was approximately US $50 per barrel (the price was volatile then too but at a much lower level!). So if we look at this mornings price we see that it has risen since then by 134%.
So the rise for those who use US dollars is simple 134%
If we look at those who use the Euro the exchange rate back at the opening of 2009 was 1.37 and is now 1.40. So there has been a small impact here as the Euro has risen by just over 2%. Accordingly the currency adjusted price of oil is US $114.4
If we now use the UK pound we can see that it has risen from £1.49 at the beginning of 2009 to £1.63 now. So it has risen over the period by just over 9%. Accordingly the currency adjusted price of oil is US $106.
If we use the Yen we need to convert the exchange rate from and use the inverse of our usual measure which rose from 92 Yen per dollar to 82. If we do this we see that the Yen has risen by just over 12%. Accordingly the currency adjusted price of oil is US $102.7
It is interesting I felt to see that the consumers most exposed to the rise in the oil price are those who consume in US dollars. The reason for this is that against the worlds major currencies the dollar has fallen since 2009. The Euro has risen only marginally and this makes me wonder if the relative inflationary pressure on the Euro zone is a factor in their threat to raise interest-rates in April. For the Uk we see that over this period the pound has risen against the US dollar and has been an anti-inflationary influence of around 9%. It is strange that the Bank of England has missed this and perhaps someone might wish to make it aware of such a fact! The performance of the Yen has been documented on here many times and whilst in itself it is painful for Japanese exporters it does have the side-effect of reducing import price pressure.
There are two main ironies here. Many will wonder as to whether a little import price pressure might help Japan to overcome her problem of disinflation (negative inflation) that has lasted for over 20 months now. Also the so-called panacea of the fall in the UK pound in 2007/08 which amounted to 25% is certainly not a panacea. For example imagine if such a fall combined with rising oil and commodity prices. The existing rise would be compounded and care is always needed in my view when lauding exchange rate falls as outright solutions to economic problems. You also have to allow for the inflation they can either cause or contribute too.
Commodity Prices: Food prices surge again
These also closed at new highs for this phase of time at the end of last week. The Commodity Research Bureau spot index rose on Friday by 4.46 to 572.98. Contributing to this was what to my mind has been one of the main causes of the unrest in North Africa and Arabia which is higher food prices as the foodstuffs component of the index rose by 6.32 to 504.77. It is of course a feature of us counting in base ten but somehow “big figure” chnages like going through 500 always seem more symbolic.
Greece receives (yet another) downgrade
This morning the ratings agency Moodys has downgraded Greece ‘s government bond rating from Ba1 to B1.In the arcane world of ratings agencies this is a 3 notch move and she also has a negative outlook. If we suspend the usual issues of what exactly changed this morning? (The timing of such moves often feels arbitrary) And if we ignore the fact that Moodys is again behind the curve we do find some interesting analysis. According to Moodys.
Moody’s decision to downgrade Greece’s rating is driven by three reasons:
1.) The fiscal consolidation measures and structural reforms that are needed to stabilise the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date.
2.) The country continues to face considerable difficulties with revenue collection.
3. ) There is a risk that conditions attached to continuing support from official sources after 2013 will reflect solvency criteria that the country may not satisfy, and result in a restructuring of existing debt.
As ever there is sense in the underlying report. If one had a theme for ratings reviews it would be that they are usually tardy but also usually describe the scene well. I have a category on this blog for Greece and have been describing that dangers of the approach taken by the Euro zone for around a year now. As to revenue collection I still remember the “tax amnesty” of autumn 2010 which frankly set a dreadful example. For the plans to post-2013 then the European Stability Mechanism remains ill-defined and frankly ill-thought out. We are back to “kicking the can down the road”.
Greece would have been set on a much more positive path if the restructuring/haircut to her debt that Moodys is afraid of post 2013 had taken place in early 2010.
The Response from Greece
From time to time I like to point out the fact that official responses are full of hyperbole and according to Reuters here is this mornings reply.
RTRS-GREECE SAYS MOODY’S DOWNGRADE COMPLETELY UNJUSTIFIED
RTRS-GREECE SAYS MOODY’S DOWNGRADE SHOWS NEED FOR TIGHTER REGULATION OF RATING AGENCIES
So no substantive reply and a rather nasty threat in the latter part.
The US economy: The employment/unemployment situation
On Friday we received the latest update on the US economy from the Bureau of Labor Statistics
Nonfarm payroll employment increased by 192,000 in February, and the unemployment rate was little changed at 8.9 percent……….Job gains occurred in manufacturing, construction, professional and business services, health care, and transportation and warehousing.
So after the weather related problems for the January figures we got a decent rise in non-farm payrolls and a further drop in unemployment. In addtion some of the back data was revised favourably.According to the New York Times unemployment has not dropped like this since 1983 and the 1983 move preceded a good period of expansion for the US economy. However we have seen a period where the jobs figures have improved which is good but there are issues with the figures and the improvement is still not fast enough. Let us look at some of the detail.
If we take the average of the last 3 months to try to see through the weather problems in January we see that non-farm payrolls have improved by 136,000 per month. So good in itself but it is probably only just enough to keep up with the growth in the US labour force. Here we do get a problem with the numbers as the BLS is becoming a little inconsistent about population growth.
The headline fall in unemployment is welcome as is the fall in the U-6 measure to 15.9%. For those unfamiliar with U-6 it is a broader measure of unemployment which seeks also to capture short and part-time working and those the BLS calls “discouraged”. So we see an improvement but still large numbers.
If we look into deeper issues there is a debate developing over the “participation rate” which measure how much of the population actually works. This has fallen from an long-term average of between 66 to 67% to 64.2%. This may seem not that significant but when you remember that this accounts for 4 million people it feels much more significant.There are a lot of arguments about this but I spotted this in the Wall Street Journal.
A growing number of workers with health problems are applying for Social Security Disability Insurance benefits. The disability rolls, where many beneficiaries remain for life, have surged more than 14% since the recession began, to nearly 10.2 million in December 2010.
So workers when unemployed seem to be taking the route of going long-term sick which is an issue the UK has also faced. To the extent that such a trend exists the fall in the unemployment rate is in fact a mirage and those who try to allow for this and other such influences argue that the true US unemployment rate is more like 12%.
The starting point is that these numbers do show that there is job creation going on in the United States. However it is barely fast enough to account for expected population growth and indeed on some forecasts for it then it is not enough for that either. So in spite of the recent falls in the unemployment rate there is little sign of a sustained fall in unemployment and there are dangers of a rise back again. I am reminded of the testimony from Ben Bernanke which I quoted from on March 3rd which revealed that the US economy had lost approximately 7.7 million jobs since the credit crunch began. So at this level of job creation we would take a very long time to get there…
Also it is easy to forget (and some have in their analysis) the extraordinary level of stimulus presently existing in the United States. Not only do we have interest-rates at near-zero but we also have a central bank currently spending some US $75 billion a month on asset purchases of US Treasury Bonds. In addition the fiscal stimulus announced in late 2010 of around US $900 billion means that the pedal is not far off the metal for official stimulus measures.
Looked at like that then the US Federal Reserve and government must have their fingers crossed for even higher job growth in the spring and summer of 2010 or they will be faced with the problem of what to do next having already deployed much of the available resources. This would not be a good place to be.