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.