Why turmoil in the Middle East can mean $200 oil by the summer (over $2 a litre)…..and a possible economic crash shortly after

In the past few weeks we’ve seen revolutions spread throughout a handful of countries in the Middle East.  We’ve seen the price of oil spike as Libya (the 15th largest oil producing nation) sits on the verge of civil war.

Today we found out that 50% of oil production in Libya is now offline, pushing crude prices ever higher.

Interestingly, many of the revolutions have been spawned on facebook and other social networking sites.  You may recall that Egypt unsuccessfully attempted to block all such sites prior to the overthrowing of the Mubarak regime.  With that in mind we turn to a troubling new development in Saudi Arabia, the largest oil producer in the world with production over 5 times that of Libya:

Hard to say just how much traction this movement will garner, but it would be unwise to underestimate how quickly the now invigorated populace in these countries can unify around a cause.  And if they do, the repercussions on the global economy will be significant to say the least.

Interestingly, Nomura published a report suggesting that if just Libya and Algeria (combined they are responsible for less than half the production of Saudi Arabia) were to halt production, oil prices would touch $220 a barrel.

While rising oil prices would absolutely benefit a small portion of the Canadian population  centred in the West, it is a full blown drain on consumer spending which drives GDP growth to the tune of 65%.  Discretionary income is eroded by higher oil prices and higher food prices most significantly as 1500 litres of fossil fuels are involved in the production and transportation of the food consumed by the average Canadian in a year.  As this discretionary income evaporates, so too does a portion of consumer spending.

The threat of higher energy prices to the global economy has not been lost on the likes of the International Energy Agency, the Bank of Canada and several other organizations:

Oil will drag down world growth: Bank of Canada

High oil prices pose threat to global economic recovery

 

Geopolitical tensions may rise

Also worth noting is the fact that several ‘moderate’ governments have toppled or are set to be toppled to be replaced by God knows who.  With the entire Middle East a powder keg to begin with, it bears considering what the political consequences will be of the new regime changes as the unrest contagion spreads.  As one simple example, the new military-ruled regime in Egypt has allowed passage of Iranian warships through the Suez for the first time since 1979, a move condemned by Israel.  Is this a sign of the times?

Iran Warships Complete Suez Canal Voyage Amid Israel Objection

As John succinctly put it in a comment earlier today, “Make no mistake. What is going on today, in countries many of us had to Google just to figure out where they are, could make all our deliberations about the movement of house prices moot, and in very short order indeed.”

Watch this all with a keen eye!

-Ben

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33 Responses to Why turmoil in the Middle East can mean $200 oil by the summer (over $2 a litre)…..and a possible economic crash shortly after

  1. Trevor says:

    On a mid-to long term could $200 oil be good for our oil sands hence good for Canada?

  2. Trevor says:

    I cannot track the Schiller comment on how Canada escaped the RE downturn because “oil was high” and it was the thing prevented us from a crash in 2008.
    I am assuming you’ve come across this article….could you comment please.

    tnx.

    • D-dub says:

      I remember reading that. I believe Schiller was accounting for the divergance between US and Canadian economies at the time–rather than aruging that sustained high oil prices are an unconditional positive for the CDN economy. When oil touched $147US per barrel, it impacted the US more severely than Canada because the US is heavily reliant on oil imports. For Canada, the pain to manufacturing and transport was offset somewhat by high earnings in the oilsands and the knock on effect of those revenues throughout the economy.

  3. John in Ottawa says:

    $200 oil could be a point on a near vertical line headed for uncharted territory followed shortly after by a collapse to zero.

    If the majority of the middle east descends into civil war, so much oil will be disrupted that western economies will be destroyed withing days. It won’t be an issue of “what price oil,” but “what oil?”

    At some point the economy can collapse to a degree that there isn’t even a demand for the little oil left to be bought.

    This is a worst case, or tipping point scenario which many would say is unlikely. However, I don’t remember reading any predictions six months ago of what is now happening in the middle east. So for now I don’t know what “unlikely” represents.

    • Lumpen says:

      Entirely possible, but if we look at where the west gets its oil, it seems less vulnerable than Asia – notably Japan, South Korea, China and India. Take a look at page 20 of the BP energy review.

      http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2008/STAGING/local_assets/2010_downloads/statistical_review_of_world_energy_full_report_2010.pdf

      This isn’t to say that this is a static picture, but realigning crude shipments isn’t done at the drop of a hat, and requires important infrastructure changes as well in many cases – refineries, pipelines, etc.

      The US looks ok on a relative basis. Europe might be a bit sticky if you throw Algeria in the mix. But both seem better off that Asia in the event of a short term disruption.

      Big hit to the global economy – yes. Halt to food production in the West, unlikely.

      • John in Ottawa says:

        Don’t forget that Washington, Oregon and California get their oil from the same place as China and Japan.

      • Lumpen says:

        Agreed – not an easy solution, but one could run trains and trucks around the continental US for absolutely critical needs and handle a ~15% import shortfall / ~9% total consumption shortfall. Not painlessly though.

        Still, better than dealing with substantially all of South Korea and Japan’s consumption from the region. Something like 65% of India’s total consumption comes from the ME. Knocks a 25% hole in China’s total consumption as well.

        I know which one I’d rather be if the taps are shut.

  4. Marco Polo says:

    The price of oil is not going up much higher UNLESS the oil producing nations decide it is. There is no such thing as tight supply. There is no such thing as supply/demand in this market. Oil is probably PEAKING imho like all other commodities. When the big speculative investors decide to reduce risk, the whole commodity complex will come crashing down. Don’t believe the trash that comes out of brokerage houses.

  5. Marco Polo says:

    By the way, this is an excellent blog.

  6. mac says:

    This post scrapes the bottom of the world-is-coming-to-an-end barrel. Lots of “ifs”. Hey! What if the people of the middle east can’t do much about the structure of their governments and over the next 8-12 months they settle back into much the same thing they’ve lived with for thousands of years with a few important and somewhat satisfying concessions from those in power? What if the speculation of the end of the world expressed in the price of oil is now near its zenith? What if the US economy continues its slow recovery?

    • Geez Mac….reread what I said, man! $200 a barrel oil is a possibility….. global economic growth will certainly slow if that happens. No talk of ‘the world is coming to an end’. Is this another example of you attacking a post before you’ve read it in full?

    • John in Ottawa says:

      Mac, you must sleep sound at night. It seems you go to bed every night assured that tomorrow will be the same as today, just better or possibly the same.

      My wife says you are a great guy, she likes you. Says I should be more like you.

  7. mac says:

    Your wife has no idea what she’s missing 🙂 But I think you’ve hit the nail on the head there, John. Bears are pessimists. The see the world darkly. Your comment about your wife bears witness to that.

    I’m also a bear but can see this trait more clearly when I read blogs like this, especially posts like today’s where one poster leads the other into darker and darker speculation.

    That’s why I like people like Mango. I’m not invested where she’s invested. I feel she might be misleading herself. But I know she may also be right. That’s why it’s a shame to drive off opposing opinion and why this blog should take in more insight from the opposing side. Let’s remember that at this point, they are the ones that have been right. So seeing the comments section going the way of Vancouver Condo Info (dot whatever) is a shame.

    And no, I don’t always sleep soundly at night. It’s funny, I always thought university economists were perfectly balanced and never came down firmly on one side vs. the other. I thought they were like bank economists! Well, I can be naive. Can we hear from Mrs. John in Ottawa and what her thoughts are? Is she a bull? A bear? A gold bug? Maybe she’s the one that really knows what’s next.

    Take care, John.

  8. ATP says:

    Mac,

    The issue is not one of optimism versus pessimism. It is realism versus faith, head versus heart. It also is an issue of upside versus downside risk.
    Personally, it matters more to me not to lose money than to possibly miss what I consider to be a money making opportunity that, at this stage of the game, is unnecessarily risky for my appetite. Perhaps it’s because I’m a professional who runs a profitable small business. All I have to do is to put in an honest day’s work and I make money virtually risk free. I’m not priced out; I just don’t like to overpay.

  9. Best Place on Meth says:

    Rising oil prices will kick the living crap out of China and it’s speculative economy.

    They have gone from importing 33% of their oil consumption to 55% in just one year.

    http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Oil/8570200

  10. mac says:

    ATP,

    I notice this amongst bears like myself too. And old world fiscal responsibility that seems to evade the participants in the current real estate market. We also talk a lot about “debt”. Interesting to me is that debtors and debtor prisons are another hallmark of the past. And again, I am reminded how wrong I am in predicting this market when I hear today that, no surprise, the OV has found buyers. It’s like the way we used to think of savings, responsibility, thrift, avoiding debt all belong to the subset of people who think the worst is coming or the worst is possible.

    However, it seems the stakes are higher for us who keep our money in cash and other conservative investments as the current bout of debt puts us at risk of deflation, which is fought with inflation-provoking measures, which gives rise to worries of erosion of value of said savings. So in the end you may get left out twice in swimming against the tide. Or not.

    • Mac I’m curious as to how you’ve allocated your assets. What is your general asset allocation in your portfolio? Your outlook on real estate in general? Vancouver in particular? Inflation/deflation?

      Despite your best efforts, it is still anatomically impossible to suck and blow at the same time. So which is it?

    • ATP says:

      I guess what concerns me most about RE is illiquidity when the price trend reverses. I don’t want to be holding any bags.
      Sometimes the concern about erosion of savings could be a trap, especially for anyone who has a stable job and income. In trying to beat inflation, one can easily underestimate risk associated with the potential return.

  11. mac says:

    YVR real estate as I said MONTHS ago on this blog will continue to split: SFH up, up and up… condos, townhouses sideways if we’re lucky… by lucky I mean not go up.

    Roughly my portfolio is half cash/fixed income, the rest equities, debt, commodities etc. I’m thinking of making a real estate purchase in the US in the next year or so. So maybe I do suck and blow. No need to corner your opponent. Try to take in the points of view of other side, my friend. Without getting your back up.

    • Mac, I have no problem with people disagreeing with me….I’m used to it. As I’ve said before, I do have a problem with people sensationalizing my writing and trying to put words in my mouth…..a habit you seem fond of at times. Case in point, refer back to your first comment in this post in which you suggested that my post was ‘scraping the bottom of the world-is-coming-to-an-end barrel’.

      A more careful reading of my posts and a fair critique of the actual content would be appreciated before you tell me not to get my back up.

  12. jesse says:

    I don’t know about $200/barrel oil; even $120/barrel would be enough to put emerging economies at below growth trend and another round of global QE. The only way I see $200/barrel is if derivatives markets start hoarding, and it wouldn’t last more than a few months — more than enough time to kick of a double-dip recession.

    It’s a good question though: is it the high price of oil that kicks off the recession or is it merely the catalyst? Prof. Hamilton makes a solid case it’s the former, as trite as it sounds.

  13. SuperPL says:

    We’ve just jumped 4c overnight to @1.21/L in the GTA, and many believe we are just at the beginning of the ME meltdown. $1.75-2.00/L is very likely by the summer, driving everything from food to electricity up with it.

  14. mac says:

    A few helpful suggestions:

    1. Get to know the difference between yourself and what you publish. Once it’s out there. It’s its own thing.

    2. Get to know that a blog posting is the posting in its entirety and a reference to it may also include the comments section.

    3. Get to know yourself better. You’re not great at taking on board the opposite opinion and letting it live. Stop taking everything so personally. Crikie. Sometimes you act as if you’re the Cake Boss and you’ve created this elaborate, gorgeously argued cake with swirly frosting. Then you put it in the blogosphere and freak out when someone puts their fingers in it. Believe me, there’s me, there was Sam, there was Mango. Three people with opposing opinions and fingers in your cake. You freak out whenever they argued their point stridently. Then you ask them to leave. You can do better than that–or not, I don’t know. (Like we’ll see if this comment makes it onto your site).

    4. Get to know blogging better. Look around. Ask other bloggers about their experience in the blogosphere. Blogging is NOT journalism. It’s opinionism that invites EQUALLY weighted opinion from around the world. Maybe email Barry Ritzholtz and see what he says about his comments section. Unless you’re getting death threats or creepy guys trying to figure out where you live, why block comments and push people off?

    • Mac….let me explain it once more. I have no problem with you disagreeing with me. What bothers me is when you wildly misinterpret my statements and try to box me in to something I haven’t said. Remember a few months ago when you attacked me for a graph that wasn’t even in my post? You admitted that you hadn’t even read the post in its entirety before posting your opinion. That’s my problem. I have never censored anything you have said. I’ve only ever censored one comment because it was a direct insult against another commenter.

      To clarify, I have never asked anyone to leave. You find me a comment where I asked someone to stop posting. Once again you are misrepresenting me. For the record I can very easily censor comments from a particular IP address so that I read them before they appear on this site. I have never done that.

      Once again….I have not blocked comments or pushed people off. You prove exactly my point that you often attempt to portray me or my writing in an unfair light. That’s my problem.

  15. mac says:

    Go back and read your invitations to both Sam and Mango to go elsewhere.

    I can’t relish every word you write. I can’t think of your postings in a way that is only pleasing to you. In other words, its’ a blog.

    I don’t think saying Max Keiser has set up a Jack Van Impe, doomsday show and is probably a nutter is insulting to another blogger–that’s just one post I’ve had “dissapear”… all the other ones relate to postings where you (and other posters) stridently argue with Sam&Mango and eventually you ask them to go elsewhere or question why they come to your blog in the first place. And I ask you why in the world are you telling them to go elsewhere?

    And what if I were to insult other bloggers. Care to go back and read Mango’s last stand? She was attacked by everyone, including you. Get real.

    It’s your blog, dude. Do what you want. You say misrepresentation. I say my interpretation.

    • Suggesting to someone who is totally turned off by my writing, sees no value in it, and visits this site solely for the purpose of attacking people, that perhaps they might want to look elsewhere for analysis is not akin to banning them….which I could have done but didn’t.

      I have never deleted a post of yours Mac. Occasionally if someone includes a link to another site it gets caught in a spam filter and stays there until I find it and indicate that it is not spam. If you go back and look for this comment you refer to you will no doubt find that it has appeared, though it may have sat in a spam filter for a few hours.

      You need to be careful in how you define ‘attacked’. We’re free to disagree with what others have posted and attack the content of their writing, but to attack the person is totally different.

      Your ‘interpretation’ has been completely incorrect in the past….to the point that you have criticized me for graphs that are not even in my writing. I’m suggesting that you’ve done that again in labeling this post a ‘world is coming to an end’ type post. All I’m asking is that you give some critical thought to what I’m writing (at least read the whole entry for crying out loud) before you go on the offensive. I think that’s reasonable.

  16. mac says:

    Who in the world said that either Sam or Mango, or myself even, fall into this category?

    “someone who is totally turned off by my writing, sees no value in it…”

    This is what I mean when I say you take the comments section far too personally. They were the other side, the counterpoint to your views. Their comments combined with your posts made it a decent blog. They’re not attacking your commenters and your commenters can take it. They’re all Vancovuer bull stompers from other blogs that have long gone moronic.

    This post and the comments that came with it (AKA: The Posting…) was a little too end-of-the-world for me. Lots of hyper negative end-of-the-world ifs without the other side… at all… and now your other side is presumably gone… and one of them Ben… I believe… was a Chinese buyer with a clue into the Chinese mindset. The only person on this blog who could have given us insight into that buying subset. But nevermind, they’re gone now so no one has to hear it, therefore the bears on this blog (I don’t mean you personally, Ben) can go back to believing it doesn’t exist. They can read Garth. They can read VCI. And now they can read your blog in safety.

    Anyway, I’m bored of discussing this as I am sure you are.

    Please tell me you’re still in or just barely out of your 20s and it will all make sense to me.

    • ATP says:

      Hi mac,

      Do you have a blog to promote your side? If not, what’s stopping you from doing so?

    • Draat says:

      Mac, I read what you say and am forced to agree – not because you are right but because you are philosophically correct. You are obviously intelligent and I completely see your point. My problem is that you remind me of Billy the Kid. Very good at gunslinging – better than most. The problem is he is famous for nothing creative. That is where Ben is good. He has taken the time to put forth “thoughts to ponder” and I suspect he hopes for opposing opinions just for the debate. Friendly kind of stuff. The problem as I see it is you are good at what you do – maybe too good, the problem is this isn’t the proper forum for your talent when aggressively applied. You can shoot me down if you choose for me stating my opinion but then you would be guilty of what you are accusing Ben of. For the record this site’s comment section hasn’t been better since a few dissenting opinions showed up.

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