Thursday, March 22, 2012
It is time to talk about oil again. After all, although it is not credited with it the black swan event that upset the financial apple cart in 2008 was the abrupt rise in oil prices in the three preceding months. This move was outside the predictive envelop and it triggered a much needed reevaluation of dodgy financial assets. It really called the banker’s bluff.
Now we read about the fear premium been promoted by a desperate Iranian regime and dodgy political accommodations throughout the Arab world. The premium certainly exists simply because even with a healthy growth in demand in
China and , there is ample oil coming to
market with plenty in reserve. India
The surprise to myself and to others is that the technological limitations on producing tight oil has evaporated and we have a massive unreported increase in reserves of oil producible at $100 per barrel. In fact, it is clear that North America will achieve self sufficiency during the balance of the decade and even be exporting oil to
The same type of oil is still not been worked elsewhere mainly because the technology is North American and it is in full use right now. Yet the moment we hit oversupply here, those rigs will fly out the door and offshore tight oil will soon be exploited.
This means that the potential of a sustained price shock is slim while the potential of a serious price discount to slow new production is excellent.
I have also posted that the only secure oil market besides petrochemicals is the long haul trucking and rail business. EVs and Fusion based heat engines are happening now. The end game for the oil market is approximately 30,000,000 barrels per day down from the present 80,000,000 barrels per day and it is all far sooner than any one imagines. The window for making your bundle in oil is getting ready to close.
Author: Nouriel Roubini · March 15th, 2012 ·
From Project Syndicate:
Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in
China; and the risk that economic recovery in
will fizzle (yet again). But no risk is more serious than that posed by a
further spike in oil prices. United States
The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the
are approaching $4 a gallon, a
damaging threshold for consumer confidence, and will increase further during
the high-demand summer season. US
The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between
has created a “fear premium.” Iran
The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the
Middle East that led
to a sharp spike in oil prices. The 1973 Yom Kippur War between and the
Arab states led to global stagflation (recession and inflation) in 1974-1975.
The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Israel Iraq’s invasion of in the summer of 1990 led to
the global recession of 1990-1991. Kuwait
Even the recent global recession, though triggered by a financial crisis, was exacerbated by spiking oil prices in 2008. With the barrel price reaching $145 in July of that year, oil-importing advanced economies and emerging markets alike faced a recessionary tipping point.
The risk that
threat to attack ’s
nuclear installations will, in fact, lead to an outright military conflict may
still be low, but it is growing. Israeli Prime Minister Binyamin Netanyahu’s
recent visit to the Iran US
demonstrated that ’s
fuse is much shorter than the Americans’. The current war of words is
escalating, as is the covert war that Israel Israel
and the US are allegedly
engaging in with
(including killings of nuclear scientists and use of cyber-warfare to damage
nuclear facilities). Iran
Iran, with its back to the wall as sanctions bite harder (especially the recent SWIFT and central bank restrictions, and Europe’s decision to stop importing Iranian oil), could react by increasing tensions in the Gulf. Eventually, it could easily sink a few ships to block the Strait of Hormuz, or unleash its proxies in the region, which include pro-Iranian Shia forces in Iraq, Bahrain, Kuwait, and Saudi Arabia, Hezbollah in Lebanon, and Hamas and Islamic Jihad in Gaza.
Recent attacks on Israeli embassies around the world appear to signal
reaction to the covert war being waged against it, and to the tightened
sanctions, which are aggravating the effects of the regime’s economic mismanagement.
Likewise, the recent escalation in cross-border fighting between Iran
and Gaza-based Palestinian militants could be a sign of things to come. Israel
The next few weeks could bring a reduction in tensions, as the US, France, Germany, the United Kingdom, China, and Russia go through another round of attempts to prevent Iran from developing nuclear weapons or the capacity to produce them. But if this attempt fails, as is likely, one cannot rule out that, by summer, Israel and the US agree that, sooner rather than later, force will have be used to stop Iran.
and the US still disagree on
some points –
wants to strike this year, while the Obama administration is opposed to
military action before facing the voters in November – the two sides are
converging on aims and plans. Most importantly, the Israel US
is now clearly rejecting containment (accepting a nuclear and using
a deterrence strategy). So, if sanctions and negotiations don’t credibly work,
the Iran US (a country that
doesn’t “bluff,” according to Obama) will have to act militarily against . The Iran US is now providing bunker-buster bombs and
refueling planes to ,
while the two militaries are increasing joint military exercises in case an
attack becomes necessary and unavoidable. Israel
If the drums of war grow louder this summer, oil prices could rise in a way that will most likely cause a
and global growth slowdown, and
even an outright recession if a military conflict erupts and sends oil prices
Moreover, broader geopolitical tensions in the
East are not fading, and might intensify. Aside from deep
uncertainty regarding the course of events in Egypt and Libya, now Syria is on
the verge of civil war, and radical forces may get the upper hand in Yemen,
undermining security in Saudi Arabia. There is still concern about political
tensions rising in Bahrain
and Saudi Arabia’s oil-rich Eastern Province,
and potentially even in
and Jordan, all areas with substantial Shia populations or other restless
Now that the
rising tensions between Shia, Sunni, and Kurdish factions do not bode well for
the country’s ability to boost oil production soon. There is also the ongoing
Israel-Palestine conflict, tension between Iraq Israel
and Turkey, and hot spots –
particularly Afghanistan and
– in the wider neighborhood. Pakistan
Oil is already well above $100/barrel, despite weak economic growth in advanced countries and many emerging markets. The fear premium might push prices significantly higher, even if no military conflict ultimately takes place, and could trigger a global recession if one does.