The last 20 month commodity slide: Dunkley’s Cold Fusion

dunkley cold fusion

Dunkley’s Cold Fusion [Just Brillant]

What links global physical market, futures market, producer countries capital flows and their currencies.

Defining the variables:

1.          D= Global Demand

2.          S= Global Supply (Cost Curve)

3.          IR= World Interest Rate

4.          Toil = Traded Price on the Futures Market

5.          Poil= Fundamental Price (Supply Demand /Equilibrium)

6.          Toil-Poil=Commodity Risk Premium

7.          Toil1-Toil2= Total Price Shock

8.          FC= Futures Curve (Oil)

9.          Short Dated Curve: f(Commodity Price Risk)+ f(Physical Equilibrium)

10.       Long Dated Curve: f(Physical Equilibrium)+(f(-1)(Real IR)f( Average Marginal Cost of New Supply))

  Oil Shocks and Transmission to the Macroeconomy of a Small Producing Nation.
 

Inside the reactor.

Example as Shown due to a supply shock causing price decline:

1.      Global  Supply Curve Shifts Right

2.      Global  Price of Oil Declines

3.       Futures curve moves from backwardation to contango

4.       Short Term Commodity Risk flips (positive risk to negative price risk and lengthens to due political risk of shock)

5.       Low Oil Prices Increase Global (Y) and over time expected inflation rate (C)

6.       World Real Interest Rates Rise from IR1 to IR2 as economy improves (exogenous, policy)

7.      Small Producing Nation keeps domestic interest rate at Real IR1 (exogenous, policy)

8.      Producing country experiences increased Net Capital Outflows

9.      Real Exchange rate depreciation in producing country

10.  IS-LM cycle

Classic Macroeconomic Constraints:

Nominal IR = Real IR+ Expected Inflation Rate

S= (X-M)-(Tax-TR-G)+I=National Savings

Y=S+C+Tax-TR=Output

Y=C+I+G+NX = The demand for goods

NX= NCO= Net Exports

NX < 0 : Trade Deficit

NX > 0 : Trade Surplus

MP=L(i,Y)

BOP= CA+KA

CA= NX

KA=z(i-IR*)+k

How Russia 1991 to Russia 2015 has worked out ?

Yeltsin: Oil $15

Putin: Oil $100

Cold fusion also happens to work in both ways…

 

 

Credit: Oil Shocks and Transmission to the Macroeconomy of a Small Producing Nation 

by Katrina Dunkley,  Sr. Economist

The Energy Diaries.

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