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Is Global Trade About to Collapse? Where Are Oil Prices Headed? A Chat With Mike Shedlock

Posted: 07/31/2012 2:38 pm

As markets continue to yo-yo and commentators deliver mixed forecasts, investors are faced with some tough decisions and have a number of important questions that need answering. On a daily basis we are asked what's happening with oil prices alongside questions on China's slowdown, which commodities or instruments will provide safety in the current environment, if the euro zone split in the future and what impact the presidential election is going to have on the economy and markets.

To help Oilprice.com look into these issues and more, we were fortunate enough to speak with the award-winning economic commentator Mike "Mish" Shedlock. Mike's blog, "Mish's Global Economic Trend Analysis," is one of the most popular and informative economic blogs online. His millions of dedicated monthly readers find his advice invaluable and we recommend anyone interested in learning more about the global economy and financial markets to stop in and take a look: http://globaleconomicanalysis.blogspot.com.

In the interview, Mish discusses:

• Why global trade will collapse if Romney wins
• Why investors should get out of stocks and commodities
• Why we have been oversold on shale gas and renewable energy
• Why oil prices will likely fall in the short-term
• Why the euro zone is doomed
• Why there may soon be an oil war with China
• How government interference is ruining the renewable energy sector
• Why we need to get rid of fractional reserve lending

OP: With oil prices now in the high 80's and news out of Europe getting worse every day, do you expect prices to stay in this range, or do you see them dropping in the short term?

Mish: There are two conflicting forces here. One of them is oil prices over the long-term and the other is oil prices over the short-term.

Even in the short-term you will find there are conflicting forces at play. For example, stress in the Middle East puts an upward pressure on oil prices. However, economic problems in Europe, a slowdown in Asia and a slowdown in the United States put downward pressure on oil prices. New orders are falling at a staggering rate across the board in Asia, China, Japan, Europe, and the United States which also puts further downward pressure on oil prices.

Long-term, forces such as peak oil and population growth in China are putting pressures to the upside.

One needs to balance all of those factors out when they are about ready to give a prediction on oil prices. My opinion is that over the short to mid-term, oil prices will go down. Long-term, energy is a good place to invest.

OP: If your prediction is correct and oil prices do go down -- what sort of impact do you see this having on the U.S. economy, if any?

Mish: That's an interesting question. However, the question puts the cart before the horse.

Looking at prices in a vacuum is a mistake. One also has to look at why prices are doing what they're doing. For example, falling oil prices that happen when supply shocks are alleviated are a positive thing. Falling oil prices because of falling demand is another. You seldom see this kind of distinction in mainstream media.

Right now, oil prices are primarily falling because of falling demand, and that is in spite of geopolitical tensions. That is not a healthy sign for the economy.

OP: As we have seen with the recent oil workers strike in Norway and subsequent rise in oil prices. Geopolitical risks always remain to keep the markets off balance. Apart from Iran are there any other geopolitical risks you think people should be aware of?

Mish: A key geopolitical risk in the long-term is that China cannot continue at its expected rate of growth. For years, the mantra has been "China, China, China," and many thought China could maintain its 8 percent to 10 percent per year growth going forward. That's not going to happen.

I agree with Michael Pettis at China Financial Markets, that China is more likely to see 2 percent growth than 8 percent or even 6 percent growth over the next decade.

Two percent growth is a shocking reduction, even from the lowered expectations that we've seen regarding China. The implication is commodity prices, especially base metals, are going to be under extreme pressure because of China stockpiles. For further discussion please see, "'China Rebalancing Has Begun'; What are the Global Implications?"

OP: What are your longer term projections for oil prices -- say three to five years out?

Mish: I think it's a fool's game to make such projections. Most of the projections on the price of gold, silver and oil are ridiculous. They are designed to sell newsletters. The bigger the hype, the greater the sales. On occasion, I will make a call. For example, when crude hit $140-plus in the summer of 2008, and others called for $200, I said oil prices would drop to the $45-50 range or so. Oil went to $35.

Moreover, those predicting $200 never bothered to think what that would do to the global economy. We saw the same thing in natural gas. People were predicting $25. Look at prices now, at roughly $3, NG fell all the way to $2.20, lower than even this staunch deflationist thought.

To read the full article, please visit Oilprice.com.

James Burgess is an analyst with Oilprice.com. He is a successful small cap investor with a focus on early stage renewable energy companies.

 

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