Since last weekend’s eurozone “grand summit”, the headlines have been positive and, in the official photos anyway, the main players appear to be smiling. As such, the global equity rally goes on. Behind the rictus grins, though, the gloves remain off, the rhetorical daggers still drawn. Having launched the biggest sovereign debt restructuring in history, Athens now faces the Herculean task of persuading holders of Greek bonds to accept a “voluntary” hair-cut.
Creditors are being asked to swap their bonds for a combination of new short-term instruments, issued by the European Financial Stability Facility, and longer-term Greek government debt. If half of them agree to take the hit then, under “collective action clauses” approved by the Greek Parliament, the deal could be forced on all bond-holders.
This is a default in all but name, then, with “the powers that be” desperate to hold the single currency together while not triggering Credit Default Swap insurance policies that could themselves spark a whole new wave of financial panic.
The reported bond-holder loss will be 53.5pc – a headline number largely for the consumption of furious taxpayers in those eurozone nations that remain notionally solvent. In reality, payment durations and coupons will be tweaked, once the media has moved on, to ensure bondholders suffer less.
To be sure, though, there is still significant loss embedded in this deal, which is why the CDS switch could ultimately be flicked. That remains the case even if tame ratings agencies confirm their ludicrous “judgment” that an imposed €200bn debt-swap doesn’t amount to a “credit event”.
France and Germany are at loggerheads. Deal or no deal, Berlin publicly insists there are “no guarantees” that Greece can be rescued even if the bond restructuring happens and the €130bn of bail-out funds flow before 20th March, the day Greece faces a massive interest payment, so allowing Athens to avoid explicit default.
If you think this deal sounds complex, and the main idea seems to be obfuscation, then you’re right. But this is what happens when monetary unions are exposed to serious systemic pressures and financially-illiterate politicians make ever more desperate attempts to resist the ultimately unavoidable logic of basic economics.
This Greek drama has a long way to run, then, but global markets remain determinedly “risk-on”. After months of angst, this rally feels too good to worry about awkward questions. The S&P500 chalked-up yet another post-Lehman record last week, amid signs of improving US consumer sentiment. In Asia, the Japanese Nikkei 225 reached a 7-week high, while the euro itself managed a 10-week peak against the dollar.
Enough of Europe, though. Despite the eurzone’s overwhelming ability to set the tone in terms of global investor sentiment, there are other economic indicators deserving attention – not least the price of oil. Brent crude hit a nine-month high on Friday, breaking through $125 per barrel. While the black stuff remains $24 below the all-time nominal peak of July 2008, it is now above those levels in terms of both sterling and the euro.
Oil prices are up 14pc since the start of the year. That’s obviously bad news for the big Western energy-importers, the UK included, that are struggling to generate sustainable economic recovery.
Oil is soaring, we’re told, because the International Atomic Energy Agency has just issued a report on the nuclear ambitions of Iran, the world’s third-biggest crude exporter. Responding to European and US sanctions on its oil exports, due to bite in July, Iran refused inspectors access to the Parchin military complex where the IAEA has “reason to believe” a nuclear detonation device has been tested. As such, the risk of near-term anti-Iranian military action has apparently just risen sharply, not least because a US Presidential election is looming into view.
Iran is obviously feeling emboldened. With the US withdrawing from Iraq, Tehran has warned that, in a bid to stem “outside meddling” in its affairs, it might try to disrupt energy exports from the Persian Gulf. This is no empty threat. Iran controls the northern shore of the Straits of Hormuz, the 20-mile wide pinch-point through which passes daily over a third of the world’s seaborne oil shipments.
While the escalation of any kind of tension in the Middle East is obviously a serious matter, I don’t accept that’s why crude prices are high. The real reason – perhaps less interesting, but no less important for that – is simple demand and supply. Global crude use is soaring, while the most important oil wells on earth are rapidly depleting.
In 2001, the world consumed 76.6m barrels of oil a day. Last year, just a decade on, global oil use was a hefty 89.1m barrels daily, 16pc higher. In 2011, the world economy was sluggish, with global GDP growth of 3.8pc, down from 5.2pc the year before. Yet world oil use still rose almost 1pc in 2011, with crude averaging $111 a barrel, more than 40pc up on 2010.
The International Energy Agency, the energy think-tank funded by oil-importing Western governments, tells us that crude demand is “declining remorselessly throughout the OECD”. Given that the Western economies remain weak and the eurozone is heading for recession, the “advanced economies” are consuming less crude.
The fine-print shows, though, that even IEA demand projections, which tend to be under-estimates, show OECD oil use falling just 0.9pc in 2012. Demand among the non-OECD countries, meanwhile, including the emerging giants of the East, is forecast to rise 2.8pc. Total global crude consumption, then, is still set to increase by another 1pc this year, mimicking the trend of 2011.
The “demand destruction” thesis is useful for Western governments desperate for cheaper oil – and it used to be true. Not so long ago, OECD oil use was so important that a Western demand slow-down was enough to lower global crude prices, so helping us recover. But rampant non-OECD demand now accounts for half the world total – and rising.
Chinese oil consumption has recently surged at an astonishing 7-8pc per annum and the Peoples’ Republic is now second only to the US in terms of overall oil use. Misguided Western attempts to print our way out of trouble using QE are also boosting crude demand and pushing up prices, as savvy investors seek an “anti-debasement” hedge.
On the supply-side, while attention focuses on geopolitical flare-ups, the important trends relate to geology and finance. Since the 1960s, the discovery rate and size of new oil and gas fields has fallen markedly. More than four-fifths of the world’s major fields are beyond peak production. The output of the world’s largest-580 oil fields is declining at a 5.1pc annual average. Strategic oil traders now worry aloud about falling pressure at Saudi’s Ghawar, Cantarell in Mexico and other giants fields. The credit-crunch, meanwhile, severely cut investment in exploration and well-development, which is likely to have long-term supply implications.
While there’s lots of hype about tar sands and shale fuels, these new technologies often expend more energy than they create, while causing horrendous environmental and water-supply problems. Conventionally-produced crude will remain absolutely critical, and demand for it will spiral, until mankind bans the internal combustion engine, outlaws ammonium-based fertilizers, dismantles the global pharmaceutical industry and learns to live without plastic. I can’t see that happening anytime soon.
Geo-political issues are important, of course. A major Gulf conflict would obviously see oil prices spike. But crude is now expensive not due to political argy-bargy but because of the fundamental truths of demand and supply. Meanwhile, Western share prices keep rising.