Greenspan: Odds favor recession

Sam Fletcher
Senior Writer

At Cambridge Energy Research Associates' annual energy conference in Houston, former Federal Reserve Chairman Alan Greenspan said there is a "50% or better" chance that the US will experience an economic recession that will curtail energy demand.

"We are at stall speed in the US but haven't yet seen the discontinuity that characterizes recession," he said. It is "quite remarkable," Greenspan said, that the US economy is able to do reasonably well with oil prices near historic highs. That's because "business was in such extraordinary good shape before this problem hit," that credit availability has not yet dried up for US industry.

Greenspan said, "Global warming is real, but its solution is going to be much more difficult than we'd like to admit. There's a presumption that we'll solve this [fuel and climate] problem with new technologies. I wish that were true." He warned that a "mandatory cap on carbon emissions risks capping energy inputs into the gross domestic product while lowering production and increasing unemployment." He said, "I'm a strong advocate of competitive market capitalism. It's the only viable system through which societies can produce significant material well being. However, with its increasing required conceptual inputs and technology, income inequality has risen. We cannot have a system, no matter how powerful, that doesn't have the support of the people."

In a separate study, economists at the Deutsche Bank AG, New York, reported core retail spending in the US was up just 1.4% in nominal terms over the past 12 months. "Such a reading, historically, has been consistent with recession," said Adam Sieminski, Deutsche Bank's chief energy economist in New York. He said: "The sharp slowdown in spending increases the likelihood that inventories will have to be pared back this quarter, in particular in the retail sector. The combination of faltering consumer spending alongside modestly rising retail inventories does not bode well for current quarter gross domestic product growth. For this reason, Deutsche Bank now sees more inventory liquidation this quarter relative to what we were assuming, enough in our view to push our estimate of current quarter real GDP growth from a flat reading down into negative territory, and one step closer to a mild recession."

However, Paul Horsnell at Barclays Capital Inc., London, noted supply-side changes have been the key source of energy price variability since 2004. Moreover, he said world oil demand now is concentrated outside the member nations of the Organization for Economic Cooperation and Development and primarily in the Middle East and China. "So the link from the day-to-day flow of US economic data onto oil demand has become an extremely tenuous one," he said.

Energy supplies
The International Energy Agency in Paris estimated crude supply growth outside the Organization of Petroleum Exporting Counties will average 970,000 b/d in 2008, with most of that growth coming in the second half of the year vs. 2007 growth that was front-end loaded. For a third consecutive month, IEA in February raised its forecast demand for OPEC crude.

Barlays Capital maintained its forecast of negligible non-OPEC supply growth in 2008. "Indeed, stripping out biofuels and Canadian oil sands, we expect conventional non-OPEC oil supply to fall," Horsnell reported. "For 2008, we see the major [non-OPEC supply] increments as coming from Brazil (314,000 b/d), Russia (203,000 b/d), and Azerbaijan (176,000 b/d)." However, he said, "The key thing about the three gainers (a combined rise of 693,000 b/d) is that they are offset by the three major sources of decline. We are currently projecting the combined decline in 2008 from Mexico, UK, and Norway to amount to 692,000 b/d."

Horsnell said, "For conventional non-OPEC oil supply to fall outside of the former Soviet Union is not a new phenomenon; indeed output is already some 2 million b/d below the 2002 peak. However, a fall in conventional oil output across non-OPEC as a whole is a somewhat more noteworthy an event."

Deutsch Bank's Sieminski warned, "One matter to watch closely is growth in OPEC natural gas liquids that traditionally is added to non-OPEC supply because OPEC does not count NGL in quotas. The IEA's OPEC NGL forecast was revised lower for 2008 after reassessing Saudi Arabian start-up schedules. IEA and the US Department of Energy expect 300,000 b/d growth in 2008." He said growth forecasts for non-OPEC supply in 2009 also should be closely monitored. "The DOE is calling for 1.5 million b/d of basic non-OPEC growth next year, and an additional 600,000 b/d of OPEC NGL for a total 2.2 million b/d offset against demand for OPEC crude."

(Online Feb. 18, 2008; author's e-mail: samf@ogjonline.com)

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