Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

We Are So Not Prepared For Another Crude Oil Price Shock

Commodities / Crude Oil Jun 15, 2014 - 06:04 PM GMT

By: John_Rubino

Commodities

In one sense, energy doesn’t matter all that much to what’s coming. Once debt reaches a certain level, oil can be $10 a barrel or $200, and either way we’re in trouble.

But the cost of energy can still play a role in the timing and shape of the next financial crisis. The housing/derivatives bubble of 2006 -2008, for instance, might have gone on a while longer if oil hadn’t spiked to $140/bbl in 2007. And the subsequent recovery was probably expedited by oil plunging to $40 in 2008.


With the Middle East now lurching towards yet another major war, it’s easy to envision a supply disruption that sends oil back to its previous high or beyond. So the question becomes, what would that do to today’s hyper-leveraged global economy? Bad things, obviously. But before looking at them, let’s all get onto the same page with a quick explanation of why everyone seems so mad at everyone else over there:

The story begins in 570 A.D. in what is now Saudi Arabia, with the birth of a boy named Muhammad into a family of successful merchants. After having some adventures and marrying a rich widow, around the age of 40 he begins having visions and hearing voices which lead him to write a holy book called the Qur’an. More adventures follow, eventually producing a religious/political system called Islam that comes to dominate a large part of the local world.

In 632 Muhammad dies without naming a successor, creating a permanent fissure between the Shi’ites, who believe that only descendants of the Prophet Muhammad should run Islam, and the Sunnis, who want future leaders to be chosen by consensus.

Now fast forward to the end of World War I: British leader Winston Churchill sits down with some other old white guys to draw a series of rather arbitrary lines through the Middle Eastern territories recently captured from the Turkish Ottoman Empire. They name their creations Jordan, Syria, and Iraq and appoint kings to rule them. Unfortunately, the new borders enclose both Sunnis and Shi’ites, along with Kurds and Christians who don’t get along with either kind of Arab Muslim. Shortly thereafter, Israel is tossed into the mix and massive but unequally-distributed oil fields are discovered, pretty much guaranteeing instability for as far as the eye can see.

Since then, the Western powers have been trying to keep the oil flowing by periodically deposing/replacing leaders and making/breaking alliances. All without the slightest idea of what they’re doing. So the situation has gone from really bad in the 1960s and 1970s to potentially catastrophic today as various Middle Eastern dictatorships and terrorist groups plot to create a pan-Islamic “New Caliphate” while secretly developing weapons of mass destruction.

Which brings us to the present crisis: The US, having deposed Iraqi dictator Saddam Hussein and spent a trillion or so dollars trying to create a functioning democracy, has pulled out, only to see the new Shi’ite government oppress the Sunni minority into rebellion. With the help (or leadership, it’s not clear) of Syrian Islamists trained in that country’s ongoing civil war, the Sunnis are on the verge of taking over Iraq, and both the US and (Shi’ite) Iran are being pulled back in — apparently on the same side.

It’s a mess, in other words, and the flow of oil, of which Iraq and Iran produce a lot, is now threatened.

So what would $150/bbl oil mean today? Several things:

Another recession. The US economy contracted at an annual rate of about 2% in the first quarter and isn’t nearly as strong as analysts had predicted going forward. Let gas go to $5 a gallon, and the consumer spending on which the US economic model depends would dry up. Put another way, we might spend the same amount but it will be mostly for gas and not much else. So much for the recovery.

Equity bear market. Stock prices depend on corporate profits, which in turn depend on sales. If Americans buy less, corporations earn less. With blue chip equities currently priced for perfection, major companies faced with a sales slowdown will, if they want to keep their stock prices from tanking, have to borrow even more money and buy back even more shares, which will only work until interest costs start consuming what’s left of their profits. Then US stocks fall hard.

Currency crisis. If Saudi Arabia manages to stay out of this latest conflict, it will see its revenues surge as it sells the same amount of oil at higher prices. But it’s not happy with the US (something about us recently tilting towards Iran) and apparently no longer feels obligated to accept only dollars for its oil. Let it start accepting euros, yen and yuan, and the result will be lessened demand for dollars, a falling dollar exchange rate and all manner of turmoil in global bond markets.

Derivatives implosion. Derivatives — basically private bets on the behavior of interest rates, currency exchange rates and corporate bond defaults — on the books of major banks have actually increased in the five years since those instruments nearly destroyed the global financial system. There are between half a quadrillion and one quadrillion dollars face value of derivatives out there, and a spike in financial market volatility would cause a lot of them to blow up.

There are other possible consequences of a major Middle East war, but the preceding is enough to make the point that the more leveraged a system is, the more vulnerable it is to external shocks. And no one has ever been as leveraged as we are right now.

By John Rubino

dollarcollapse.com

Copyright 2014 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

By John Rubino

dollarcollapse.com

Copyright 2014 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules