Liu Yuhui: Three Financial Factors to Look at Oil Prices

Although the international oil price has fallen for a week, it still runs at a high level above $120 a barrel. Will international oil prices continue to fall or resume gains in the short term? In this regard, there are obvious differences of opinion in the economics community.

The OPEC Chairman-in-Office believes that if the US dollar exchange rate continues to rise and the Iranian nuclear crisis is resolved in the future, oil prices in the international market may fall to between US$70 and US$80 per barrel. In my opinion, this judgment contains at least two meanings. One is the seventy-eighty-dollar dollar, which is the oil price level on the eve of the subprime mortgage in August last year. This may be a balanced position reflecting the growth of world oil demand corresponding to oil demand. Second, the current high oil prices mainly reflect financial factors. In the period of global economic turmoil, financial premiums can often account for 60%-70% of the decisive factors of crude oil prices, because global capital is everywhere, looking for a safe haven for funds.

Therefore, whether the oil price peaks in the future, financial factors are decisive. It may be worth considering from three aspects.

First, the financial risks of the United States are far from being lifted. The decline in house prices, the first outbreak of subprime mortgages; further decline, the "two houses" with national credit also have problems, which means that the main body of mortgage loans - quality loans (more than 60%) have problems; the market is widespread It is expected that CDS (credit default swap) is the next big risk hazard, and some institutions predict that the size of CDS is 25 trillion US dollars, and some say it is 62 trillion US dollars. The credit default swap is completely over-the-counter, without any government regulation, and more importantly, it has a large risk amplification effect. There are also comprehensive credit crises that may be caused by mortgages, such as credit card crises and commercial real estate crises. Even if these factors are not as expected, or the severity is not necessarily the same, but the future faces so much uncertainty, it is difficult to get the attractiveness of dollar assets at this time.

Second, the US government’s rescue of the financial crisis may only weaken the dollar and push up inflation. In theory, financial aid can be solved by printing money or shrinking financial expenses. However, the position of the US dollar in the international monetary system, "a high degree of monopoly of no government regulation", determines that the former is certainly rational. What's more, international investors hold $16 trillion in financial assets. No one dares to take the lead in selling US dollar assets. The chain effect of several major central banks can trigger a collapse of the dollar, and no one can bear the consequences. If it can't be sold, then the choice of the game is naturally: consciously maintain the balance of the dollar. This means that the United States can continually transfer the losses caused by the financial crisis through monetization, and this measure will only lead to the depreciation of the US dollar without the collapse of the US dollar.

Third, the era of high debts has led the Fed to raise interest rates and smuggle. Because the debt of American families and countries is almost 3.5 times that of US GDP, raising interest rates may lead to a bigger financial disaster if it causes house prices to collapse. Therefore, the high debt makes the Fed's decision to raise interest rates against inflation becomes extremely difficult, which is why the Fed Chairman Volcker in the 1980s can significantly raise interest rates to curb inflation, but today it is difficult.

What's more, in the current global economic structure, the ability of the United States to endure inflation is beyond the reach of the 1970s and 1980s. 80% of the three production, 15% of the manufacturing industry, the transfer has been transferred, the economy is very resistant to energy prices. Correspondingly, today's emerging market countries that carry global manufacturing have to endure the same pains of the United States that year. For the United States, the pain of rising oil prices is only a matter of “lifestyle choice”. For emerging market countries, it may be related to the problem of “eat” – rising oil prices, rising corporate costs, falling profits, and rising unemployment. The economy is hard landing, and national income is falling...

To be honest, the current pattern is that oil prices are soaring and the whole world is suffering. It depends on whoever wishes to marry first, which means that others are getting rid of it. To some extent, this is also a game of national competitiveness. (The author is the director of the China Economic Evaluation Center of the Institute of Finance, Chinese Academy of Social Sciences)

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