Saturday, February 18, 2006

Oil back on the Radar

Many new readers may wonder why this Blog is concerned with oil. Please allow me to summarize my feelings as to why I believe it is important: Oil is absolutely vital to our economy, and higher oil prices will drive inflation. This rising inflation will negatively impact the consumer, who is (as I’ve previously pointed out) completely broke. In return, broke consumers who can not take on the added impact of higher fuel costs and inflation can not afford new homes, will start pulling back on spending, and may possibly increase credit cards defaults, home mortgages delinquencies, etc. (Note: Consumer spending has been responsible for 70% of US GDP). As consumers pull back on spending and increase their rates of loan defaults, our economy will contract. When our economy contracts, companies start lying off workers, the stock market falls, people lose more money, etc. Corporate layoffs exacerbate the situation, as folks are unable to pay bills, etc. Bottom Line: Higher oil prices can set off a chain of economic events our country is unprepared for.

I’ve discussed some of these issues before and you can see this link for more info.

Anyway, with all that said, it look like the recent fall in oil prices (sub $60 barrel) is over. Several issues are back on the Radar and we will see oil prices begin to rise again very soon. The current issues:


In Nigeria, Militants have started to launch a new wave of attacks, have kidnapped 9 more Shell workers and forced Shell to shut down a facility responsible for 400,000 Barrels of oil a day.

Nigeria produces about 2.5 million barrels a day and further attacks could make Oil officials reevaluate their operations in the area

In Venezuela, currently responsible for 1.5 Million barrels of oil supply for the US, President Hugo Chavez recently warned that he could cut off oil exports to the United States if Washington goes "over the line" in attempts to destabilize his left-leaning government.

In Iran, the U.S. will likely be forced to decide whether to accept a nuclear-armed Iran, or to take out their nuclear facilities with air strikes… I expect the latter. If this happens, Iran will cease oil shipments and/or create a choke point in the Strait of Hormuz--eliminating oil deliveries from Saudi Arabia, Kuwait and Iraq as well.

Bottom Line: As I’ve stated before (in Time to Worry), with already strained oil supplies (a mere 1% difference between world oil demand and world oil production & supply capacity), any significant disruption in the markets could easily send oil rocketing above $100 barrel oil. This would cause gas to jolt above $4 a gallon, and create a massive drag on the US economy (certainly a major Recession, possibly a Depression). It would also put pressure on the US Dollar (as the worlds reserve currency), but we’ll save that one for another day.

Regards... Randy


41cadillac said...

Yes, My favorite commodity, oil and natural gas!

Plastic made from oil!
Road asphalt made from oil!
Cars run on oil of course!
Airlines depend on fuel oil!
Electricity from natural gas!
All construction depends on oil!
Homes heated with oil and gas!

I am sure you get the point.

All other energy sourses of course will help, BUT this earth runs on oil.

World citizens cannot live without oil. An overpriced house can be chucked. The overpriced houses will be chucked.


Osman said...

What are your thoughts to Peak Oil and the fact that the leading edge of the baby boomers is now of retirement age?

Here's my locally focused real estate research blog.

41cadillac said...

Randy: Did you see this!

Median home prices could shoot up 30 to 40 percent over the next two years.

"I feel comfortable with that, although 40 percent would be in the upper end of possibility," Yun said. "As for the lower end, getting double-digit appreciation will be an easy task for Seattle."

The senior economist for the National Association of Realtors, Yun holds a doctorate in economics and regularly analyzes home-sales trends throughout the country from his office in Washington, D.C.


Anonymous said...


When OPEC saw the price fall below 60, they threatened to cut exports. MAN! It looks like Opec will do everything in their power to keep prices high!

contrarian2day said...

41 Cadillac: Read the article you provided...That guy is either smoking crack or drinking way too much kool-aid. Either way, I think he's in for a disappointment.

OSMAN, regarding Peak Oil: When we tally in China, India and other growing economies, world energy consumption has never been greater and Oil supply lines are becoming severely strained. I believe we are very near, if not already in Peak Oil.

With that said, baring a war with IRAN or a catastrophe in the strait of Hormuz, I don't believe the full effects of peak oil will be felt for several more years. I strongly believe that our economy is set to contract (recession or depression), and when it does, China and the world will also contract. This contraction will reduce oil consumption across the board, and supply lines should have no difficulty keeping up with demand.

Only during the next worldwide recovery phase (my thoughts anyway) will Peak Oil really come in to play.

Regarding Baby Boomer Retirements: These are the only folks with any money in our economy today and when they begin to retire, they will take money out of their investments (stock market will decline), they will require earned benefits from previous employers (more pension plans will go belly up and fall on PBGC), and they will require more from our federal government (which will add more red ink to our already dismal state of affairs). Bottom Line: It will be very bad for the US economy

Stu said...

From here
In a stunning speech given on 15th February before the House, Rep. Ron Paul (R-Texas) finally gave the US government the formal and thorough thrashing it deserves for wreaking decades of economic destruction at home and abroad through a corrupt and debased fiat DOLLAR backed by a massive military industrial complex.

The full transcript is available here:
The End of Dollar Hegemony

contrarian2day said...


Outstanding article! I printed it out and shared with several friends.