Category Archives: oil

Commodity and Oil Price Shocks

Headwinds for the economy as the price of oil skyrockets.

While some put the unrest in the middle east down to a popular yearning for the ability to vote the Muslim Brotherhood and similar groups into power the reason is more prosaic: rising prices, especially food and other basic commodities.

One year corn price chart:

Corn Futures

One year wheat:

Wheat Futures

Not just food:

Cotton Futures

Importantly for Indonesia, rice, has not quite joined the party, yet, although famed investor Jim Rogers is 'bullish' on it, which is a bad sign...

Rice Futures

And now oil; three month crude oil futures:

Crude Oil Futures

Now above the key $100 level, with some, such as Jim Rogers again, forecasting $150 oil soon.

Background: the 2008 stockmarket crash in the US was preceded by a massive liquidity shortage among large banks; the US Federal Reserve's response to this was "quantitative easing", a policy to increase liquidity, basically print more and more dollars, to encourage fearful banks to start lending again, spur on economic activity and prop up the stock market; when liquidity increases, so does inflation, and because the dollar is still the world's reserve currency, this inflation gets exported all over the globe, resulting in the rising basic commodity prices as above.

Back to oil. 'Premium' fuel is subsidised to the tune of about 40% at the pump in Indonesia. The 2010 budget allocated 88.9 trillion rupiah for subsidies, while at this year's budget the subsidy had to be increased to 95.9 trillion, but this figure was based on an average oil price of $85 per barrel, well below the current level.

Hatta Rajasa, the coordinating minister for the economy, said in late February that a plan to reduce the subsidy had had to be shelved, due to the rising cost of oil, thereby guaranteeing a much higher burden for the state.

In neighbouring Thailand they have a similar issue with fuel subsidies, but seem to be coming to the reverse conclusion as to what to do about it: Thailand may remove oil subsidy as fund runs out

Thailand's state Oil Fund has fallen to about 7 billion baht ($230 million), the Energy Ministry said on Friday, suggesting the government may soon remove a fuel subsidy

So there is a bind: reduce the subsidy to save money/maintain finances (possible Thai route), or maintain the subsidy to.... lighten the burden of the people/prevent civil unrest (Indonesia).

We shall see which is the wiser policy.

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The continuing BP oil spill disaster has grabbed headlines around the world for weeks, but estimates of its economic impacts are only beginning to be assessed, and many will stretch out for years to come. The oil disaster is already being labeled the worst in American history, and with hurricane season fast approaching in the Gulf, the additional moniker of “Oilzilla” has also been coined to communicate its potentially monstrous effects.

BP oil leak  – Obama and BP

The Exxon-Valdez polluted 1,300 miles of coastline with 11 million gallons of oil. In the first year, the state of Alaska lost over $5 billion in diverse economic activity. Eventually, Exxon was forced to pay $3.5 billion in clean-up costs and fines. Within the first week, local wildlife was decimated, a loss valued at more than $218 million.

Bp poil leak  Obama economic 

However, the Exxon-Valdez proved that the first year of losses is only the tip of the “oil-berg”.  Twenty years later, some Alaskan species, primarily the herring, have yet to recover, and the commercial fishing industry continues to struggle. Thousands of gallons of oil still remain trapped in the sand and will require many decades to degrade.

The BP oil leak has already defiled the Gulf with over 30 million gallons of crude, nearly three times the Exxon-Valdez amount, and with no end in sight. The economic devastation to Louisiana has been immediate. It has contaminated 100 miles of coastline, polluted coastal wetlands, and threatens national wildlife refuges, the home for many endangered species. The state of Louisiana was also forced to shut down fishing in the area. Commercial fisherman that harvest nearly one billion pounds of fish and 3.2 million recreational fishermen were shut down in the process.

The economic carnage does not stop there. The Gulf States, from Mississippi through Florida, have suffered from both curtailed fishing operations to severely reduced tourism when most were counting on a favorable travel season to overcome the recession. The Gulf accounts for over 70% of the nation’s shrimp output, according to federal statistics. Due to the spill, roughly 22% of the Gulf is closed to seafood harvesting, thus idling oyster and shrimp boats that operate within the 55,000 square miles of sea now off-limits. Restaurants as far away as New York are already feeling the rise in fresh seafood prices. However, large grocery chains buy their shellfish from as far away as Thailand and Indonesia, but demand for those products should increase very soon.

While seafood prices are rising, tourism is unfortunately falling. Occupancy rates are down 90% in some regions along the Florida panhandle, and the threat of a dismal summer travel season will only increase when higher gasoline prices at the pump curtail family travel plans. While financial pundits have focused lately on Euro to Dollar charts, they soon will be decrying the impacts of rising transportation costs, which affect nearly everything from the food you buy to all retail products in general.

Major concerns do not stop with inflation. Of larger concern to Louisiana are the lost jobs from the oil industry if their operations are curtailed or if they decide to move their rigs to other locales. $70 billion alone has been assigned to that impact, far greater than the $15 billion figure tossed around for current economic damages and clean-up expenses. The Gulf shipping industry is also threatened. If the Gulf becomes a barrier to commerce, the tax and revenue impacts on local port authorities and import/export businesses will be devastating.

And what about BP Oil? The company is the largest oil producer in the United States and fifth in the world, but its stock has plummeted 34% since the explosion in April, destroying $96 billion in wealth in the process. BP PLC has thus become a likely takeover candidate by another oil industry giant.

Although investors may be searching the Indonesian stock exchange for growth opportunities, Gulf fishermen are pondering another long-term issue. Fish spawn in deep water, and future generations of fish are already being destroyed by current contamination. Glen Brooks, president of the Gulf Fishermen’s Association, recently opined, “All that larvae is up in that water. Those are fish we’d probably be catching six to 10 years from now.”