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Trade Wars and Oil Usage

For discussions of events and conditions not necessarily related to Peak Oil.

Trade Wars and Oil Usage

Unread postby EdwinSm » Fri 20 Jul 2018, 09:42:41

We are still in early days with the USA - China trade wars, but there is the threat that ALL Chinese goods will be into the USA will have higher taxes [https://www.bbc.com/news/business-44898629]. While this will increase inflation in the USA, it might lead to a collapse of trade.

So far the Baltic Dry Index is near the top of its 52 week range. [https://www.bloomberg.com/quote/BDIY:IND] This means that it does not look as if this index is showing signs of showing excess capacity, that I would expect from fewer goods being ship due to higher prices, but then we are only at the beginning stages in this.

While sea transport is very efficient, the movement of goods also involves less energy efficient trucks and sometimes trains. So is the Baltic Dry Index a good proxy measure for the amount of fuel needed for world wide movement of goods?

I suppose at this stage I do not see much reduction in oil needs brought about by the early stages of the trade wars.


ps. feel free to deal with other economic factors of this, like inflation.
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Re: Trade Wars and Oil Usage

Unread postby Outcast_Searcher » Fri 20 Jul 2018, 10:26:11

EdwinSm wrote:We are still in early days with the USA - China trade wars, but there is the threat that ALL Chinese goods will be into the USA will have higher taxes [https://www.bbc.com/news/business-44898629]. While this will increase inflation in the USA, it might lead to a collapse of trade.

So far the Baltic Dry Index is near the top of its 52 week range. [https://www.bloomberg.com/quote/BDIY:IND] This means that it does not look as if this index is showing signs of showing excess capacity, that I would expect from fewer goods being ship due to higher prices, but then we are only at the beginning stages in this.

While sea transport is very efficient, the movement of goods also involves less energy efficient trucks and sometimes trains. So is the Baltic Dry Index a good proxy measure for the amount of fuel needed for world wide movement of goods?

I suppose at this stage I do not see much reduction in oil needs brought about by the early stages of the trade wars.


ps. feel free to deal with other economic factors of this, like inflation.

I'm not convinced the BDI index reliably tells us much re the global economy.

According to Wiki, the BDI composition was adjusted as of March of this year.

https://en.wikipedia.org/wiki/Baltic_Dry_Index

It seems to me that over the past 5 years, the BDI has been correlating relatively strongly to crude oil. But looking back further, that correlation doesn't work too well.

Relative shipping supply vs. demand seems to play a big role as well.

...

So very interesting topic and kudos for trying to look for indicators for what the markets think re a potential big trade war -- I'm just not convinced the BDI will tell us more than, say, the global stock markets, oil, copper, gold, etc. over time.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: Trade Wars and Oil Usage

Unread postby Outcast_Searcher » Fri 20 Jul 2018, 10:34:01

EdwinSm wrote:ps. feel free to deal with other economic factors of this, like inflation.

Since, clearly, the major risk from a broad trade war is much higher prices (and their side effects like a much weaker global economy -- or at least economies of the main participants in the trade war), inflation is a key thing to ponder, IMO.

Ironically, moderately more inflation in the US might be a good thing for a while at this stage. For one thing, I keep seeing articles worrying about the FED having policy room to deal with another economic crash. I presume meaningfully higher interest rates would help. They might also help animal spirits re economic opportunity -- for those looking beyond the trade war.

OTOH, re debt and investment via nearly "free" money to borrow, that activity comes to an end.

I still think it is VERY hard to make good predictions from reading such tea leaves. Way too many moving parts -- one can be right about, say, inflation, and very wrong about what one wants to bet on, like oil or the stock market, because of completely random or unexpected peripheral issues like geopolitics or some other unexpected overall economic trend.

(What if we had higher inflation AND much stronger US growth than expected. What does the stock market and oil do then, for example?)

IMO, there's a good reason why overall, all the investment newsletters (mostly blogs these days) are collectively basically worthless (re reliable, actionable investment advice -- i.e. why the genius giving the "advice" isn't wildly rich). Too much randomness to profit from being "smart" about a prediction or three.
Given the track record of the perma-doomer blogs, I wouldn't bet a fast crash doomer's money on their predictions.
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Re: Trade Wars and Oil Usage

Unread postby EdwinSm » Sat 21 Jul 2018, 09:14:44

O_S - I was not sure about the BDI as a good proxy index. If I remember correctly it crashed during the 2008 crisis but a closer look at the time showed a massive oversupply of new bulk carriers, being launched just when trade went down. 10 years should have been enough time to work through some of the issues (but too often in finance and commerce it seems that there is a herd reaction rather than the smooth working of the market).

However, with the BDI holding up it indicated to me that at this early stage there has not been a noticeable down turn in trade volumes.
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Re: Trade Wars and Oil Usage

Unread postby Pops » Sat 21 Jul 2018, 09:51:38

BDI measures bulk shipments of things like steel, grain & ore, not finished goods like cell phones, so it might tell something about future production, but it doesn't say much about current consumption. Maybe the BDI uptick is just panic buying and stocking up out of fear of tariffs?

The best measure of fuel used for commerce would be diesel. IEA says stocks are lower than average, EIA says a speck low but not terrible.
IEA wrote:Middle distillate holdings fell 7.4 mb in April and were significantly below the five-year average in the Americas and Europe ahead of the peak demand season in the northern hemisphere.

https://www.eia.gov/dnav/pet/hist/LeafH ... ISTUS1&f=M

--
I think the biggest added (non-war) danger from the trade war is a currency war. Oil is still traded in US$ so FX is huge to oil price. China doesn't import as much stuff from the US as vice versa but they can battle tariffs by making stuff they sell even cheaper with a weak currency. That's before they quit buying US debt making the dollar even stronger because interest rates will rise.

As the world’s largest economies open up a new front in their increasingly acrimonious game of brinkmanship, the consequences could be dire -- and ripple far beyond the U.S. and Chinese currencies. Everything from equities to oil to emerging-market assets are in danger of becoming collateral damage as the current global financial order is assailed from Beijing to Washington.


Image
https://www.bloomberg.com/news/articles ... nipulating

A stronger US$ makes oil more expensive to people who don't get paid in US$ thereby lowering demand, which in turn limits price... which is good for US consumers but not for the economy overall, especially exporters.

Even if you think we should be trading beads for arrowheads with the neighboring tribe, I'm pretty sure none of us have any idea of the ramifications of building a wall and exiting the world. As usual, it's the getting there that's gonna be interesting.
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