Butterfly effect – oil to hit $100
When Edward Lorenz, an MIT meteorologist, first described the Butterfly effect it signalled the introduction of chaos theory, in effect the study of minor cause to massive effect. He asked – Does the Flap of a Butterfly’s Wings in Brazil set off a Tornado in Texas?
Well we all know now that markets are set off by seemingly inconsequential and unrelated events, over the past few days though we are drawn to ask the question again. This time the connections are more obvious as we’ve grown more used to the cause and effect.
As we sit here in our air conditioned city office gazing out at the bustle in the street below we wonder how many people will link the kidnapping of an Israeli solder to the sticker shock at the gas pumps – and will this be one more nail in the coffin for the American car industry as people flee from the gas guzzlers it produces – will the thousands of workers thrown out of jobs ever attribute it to that poor unfortunate Israeli soldier?
As we know, oil hit another record yesterday, pushing beyond its previous record the week before, August Light Sweet Crude rose 98 cents to $75.88 beating the previous high by 10 cents.
Today, as the Israelis bomb Beirut’s airport we can only expect further escalation of the conflict. With more countries drawn into the conflict – Israel has already warned Hezbollah’s backers in Syria and Iran – the likelihood of $100 a barrel looms large.
The International Energy Authority (IEA) has forecast the world will need an extra 1.57m barrels per day to support economic growth next year, up from the growth of 1.21m barrels per day for this year. So short supply and increased demand can only have one effect – upwards in price.
The net result of this will be a massive jump in the US trade deficit – in May there was a surge of 16.9 percent, attributed mainly to the increased foreign oil bill – totalling $27.9bn, up $4bn on April.
The only good news is that adjusted for inflation, the price of oil is still lower than in 1979. Though we suspect the world can gain no solace from this as the likely impact is felt immediately at the petrol pumps and later on with economic decline on a global basis.
The butterfly has flapped its wings.