Monday, 8 September 2008

Is the "Credit Crunch" Over ?

Stock markets across the world have risen sharply today following the decision by the US Government to bail out the troubled mortgage lenders, Freddie Mac and Fannie Mae. This long called-for move, perhaps curious to those constantly berated by free-market Thatcherite economists that State intervention is almost always wrong, has been welcomed in the US and elsewhere.

The belief in the market is that stabilising the weak US property market will ease pressures across the whole financial system leading to an end to the credit crunch and the start of financial recovery (or more cynically the start of another merry-go-round of insane borrowing and insane credit management).

Some analysts are less convinced - others believe that the recovery will begin as weakening economies master inflation and begin cutting interest rates thus encouraging economic activity.

Perhaps they are correct but, to me, the elephant in the room remains oil prices. Today, prices have risen again on fears that Hurricane Ike will disrupt production in the Gulf of Mexico. In addition, the forthcoming OPEC meeting is dominated by calls from some producers for a cut in supply though that won't get far if Saudi Arabia doesn't play ball but, as always, that country's position is far from clear.

Tension remains in the Middle East with the continuing threat of an attack on Iran by Israel and as the Northern Hemisphere moves into winter, there is also the uncertainty of cold weather leading to increased demand.

Oil prices have, of course, fallen from their peak of $147 in early July though at my local garage, the pump price has come down from 118.9 to 109.9p a litre which doesn't really reflect a near 25% fall in the overall oil price. The price fall has been predicated on two factors - first, both the Saudis and Americans put extra supply into the system but second, the belief grew that weakening worldwide economies would lead to weakening demand for oil especially in Europe and Asia.

IF today's events are the start of recovery, it stands to reason that as economies recover and grow, so demand will increase and that demand will lead to a renewed rise in oil prices which, if it came sharp and sudden, could choke off that very recovery. It will be fascinating to watch the oil price in the next five years - it has become an extraordinarily volatile and sensitive indicator fluctuating wildly on rumour and speculation.

Stability looks unlikely and paradoxically, the stronger the recovery the more likely the next oil price shock will affect economies more harshly.

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