Striking Echoes of the 1970s?

Rob Mackrill - Fri 25 Apr, 2008

Problems in the 70s score echo those today with high food and energy prices and strikes.

Remember the 1970s?

“It was the decade of strikes, electricity shortages and piles of rotting rubbish on the street,” recalls a BBC report.

Your editor is old enough to remember homework by candlelight, the three-day week and grim-faced militant union leaders such as Arthur Scargill barking pay demands every night on the TV news...

There was a food crisis too. In 1972, grain prices doubled and remained high until 1975. And Henry Kissinger attended a hastily arranged World Food Conference in 1974 to tackle it. He emerged from it asserting boldly no child would go to bed hungry within a decade.

Then in ‘73 the oil crisis broke. Arab OPEC members were outraged at the West’s support for Israel in the Yom Kippur war against Egypt and Syria. It stopped shipments of oil to the US and Western Europe. At the same time all of OPEC decided to up its prices following earlier failed negotiations with the “seven sisters” – the seven biggest Western oil companies at the time.

The impact of this action was a dagger to the heart of the oil-dependent industrialised world. The price of crude went up fourfold (to $12!) and sent Britain’s already troubled economy into a tailspin. Growth stalled and inflation as measured by the old-style Retail Prices Index rose from 5% at the start of the decade to a high of almost 27% by August 1975. From a low of 5% in 1971, interest rates soon rose into double digits and hit 15% by 1976.

Spot any pattern here? History may not exactly repeat itself, but some say it has a tendency to rhyme. Today oil’s high, food prices have been shooting up and workers are industrial action is once again making the news.

Following a one day teacher’s strike yesterday, we find oil workers at the Grangemouth oil refinery in Scotland are going on a two day strike starting on Sunday. The dispute is not about pay so much as pensions. The Wall Street Journal reports:

“ Britain’s Labour government faces the biggest wave of industrial action since it came to power 11 years ago.”

Tony Blair may regret being forced out as Prime Minister, but he can have few complaints about the timing.

Why is some obscure refinery in Scotland making the news anyway? Well it’s far from obscure to those in the oil business. It is the receiving end of the major artery in the North Sea oil pipeline network. An artery that stretches from Grangemouth, south of Edinburgh, at one end to the Forties oil field some 235 miles away out in the North Sea at the other.

The pipeline transports the accumulated crude from around 70 oil fields in the North Sea, amounting to over 40% of the UK’s entire crude production (1.6m barrels/day). So it matters. It means BP may have to close the pipe, with the potential cost estimated at £50m a day. And the strike may only be for two days but it will take a week to boot up the refinery again afterwards. So twenty-four hour news is busy telling us all about it on the one hand, and telling us not to panic and flock to the nearest petrol station on the other.

So here we are after more than three decades, oil prices are high, food prices are going up and now, strikes are back. In the ‘70s the food/fuel double whammy led to stagflation - stalled growth with inflation. And this could be where we’re heading now. Deflation in the housing market forces consumers to tighten their belts and their resultant lower spending crimps growth. The latest figure for annualised UK growth is 2.5% having hit economists’ central expectation in the first quarter at 0.4%. Its lowest since 2005 but forecast to go a good deal lower yet. Meantime those food and fuel prices keep upping the inflation gauge. CPI is 2.5% and will likely go over 3% by summer. As Bill has repeatedly said this is where the forces of asset deflation meet those of commodity “cost-push” inflation.

And on the subject of commodity inflation, this is a growing bubble that’s not getting a whole lot of attention while everyone’s busy rubbernecking the spectacular car smash that is the credit crunch. Inflation and Chinese demand make the bull case strong, but one day it too will go pop. One investment banker tells the FT his biggest worry right now is not the credit crunch; it’s the counter party risk attaching to commodity trading.

The FT notes that the Goldman Sachs Commodity index has now risen 238% in the past three years, and the mood amongst investors is that commodities can only go up. Some of the younger traders have never known oil below $50/barrel and some commodity trading firms are pretty thinly capitalised. Someday soon the commodities bust will hit the headlines too.

Meanwhile over in Japan, high food and fuel prices look to have finally called time on a decade of deflation. Japanese bonds got crushed following a headline core CPI rate that “leapt” to 1.2% for the year – its fastest pace in a decade.

Regards,

Rob Mackrill
The Daily Reckoning