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Oil prices
The Middle East and Us
March 11, 2011 Filed in: Observations | Perspectives | Energy | Economy | Wild Cards | Tracking | Leadership | Middle East
The best case scenario for an American economic recovery, avoidance of inflation, and $6 gasoline? Moderation. Ghadifi quietly leaves Libya. A compromise between the separatists and the former cabinet and military. Eqypt remains somewhat quiet and their military fulfills promises of Mubarak crony removals and elections.
But those two possibilities are far less than certain. I’d give them less than 40% probability right now. Libya’s important production of light sweet crude oil will come offline for some time. Today I passed my first sign for $5.00 gasoline in San Diego, CA.
The more troubling events could occur in Saudi Arabia. The mere fact that government troops are firing rubber bullets at crowds is chilling. Despite the royal family throwing billions at the less advantaged citizens the groundswell from the educated population could destabilize the largest exporter of oil in the world. Crux facts: there is a huge concentration of the Shia minority around the Saudi’s oil production and shipping locations. Just like Benghazi in Libya, it’s strategic.
So what?
Think 1979.
Oil prices spike to $200 or perhaps beyond.
Oh yeah, you might not have been born then or you are too young to remember. Lines around blocks at gas stations (and there were almost 3 times as many as we have today with a population half the size). Declaration of a national crisis. Rationing. Price controls. Gas cans in auto trunks. Third world stuff.
Then, in the years that followed, runaway inflation coupled with a recession and double-digit interest rates. I was running a business in a market with real resistance to price increases when my operating line of credit went to 22%. It’s one reason I never, ever again want to make payroll for more than 40 people.
Worse, the US government can’t absorb a huge spike in what it pays to service the debt. The dollar will be wiped away as the world’s reserve currency, capital will leave the country, and the 1930’s will repeat and potentially be even more catastrophic.
I’m not saying the scenario is likely. I think it is still less than 30% probable but that probability increases daily to the point where we want to think through implications and actions.
In a recent Twitter post I pointed out a NY Times article on a fellow who’s gone “off the grid” in Texas by living in the desert on solar and wind power and capturing rainfall for water. Funny thing is that it’s both one of the most read and most e-mailed articles on the publication at this writing.
More in the days and weeks ahead. Hope for moderation in the Middle East and some leadership in our country. This could become a perfect catalyst for us to take steps to begin resolving our financial, energy, and world dominance issues.
The Oil Forecast
February 25, 2011 Filed in: Energy | Implications | Global | Forecasts | Wild Cards | Observations | Perspectives | Future of...
My logic: the recession reduces demand but only temporarily. Recovery from recessions is uneven globally. Some regions recover months, perhaps even years before others. A robust economy in Asia and to a lesser extent in Latin America will create demand that will drive prices up despite a slight fall in use in the U.S. and the EU.
Speculation or unexpected geopolitical events – “triggers” – will create volatility. Speculators will enter the market on supply shortages. No regulating body can keep them away from the opportunity to make money.
My forecast from mid-2008 forward: 75 to 85% confidence that an oil price spike and permanent plateau above $100/barrel will come sometime in the 2011-2014 time frame.
It’s been of interest to clients in, well, almost every field. Because as one CEO said to me on being asked what energy prices affect, “Everything!”
As the economic recovery has forged ahead strongly almost everywhere except the North Atlantic the price of a barrel of oil has risen back through the $50, $70, then $90 levels. Now the unprecedented events in the Middle East have taken Brent futures over $111. West Texas will follow.
Will it stay there? Of course it depends on a complex array of factors. Economic effects, how high the price spikes, volatility, whether the Saudi’s can really make up most of the shortfalls, refining bottlenecks, and more. In the weeks ahead I’ll place more information here on the implications of this important trend.
In the meantime I’m getting a lot of queries from clients who quickly remember my forecasts and are running through their Plan B strategies to react to the development or are confident because they planned for the high probability of this years ago.
Trouble to the South
August 31, 2010 Filed in: Perspectives
A situation that gets a lot of comment is the emerging crisis in Mexico. When a huge trading partner is facing loss of control of large areas of its nation it signals bad news to come. The current government in Mexico is facing the convergence of several forces:
The powerful drug cartels have not only gained control of several provinces but face up readily to federal troops. They have equivalent if not better armament and intelligence sources.
The wage gap vs. the United States continues to drive illegal border crossings. Much of the revenue paid by Central and South Americans now flows directly to the drug cartels. It’s a multi-billion dollar business.
A precipitous drop in oil field productivity. The country has already become a net importer of oil. A key source of revenue and economic base is fading away.
The Calderon administration is wavering on the use of force to fight the cartels. The cartels get media coverage on their own terms at will. Public perception is the government is impotent.
Some of the impacts:
- Which party wins the next election? Will the US eventually be dealing with a cartel-controlled government?
- When will the violence spill over the border? Will we see massacres of undocumented immigrants on the US side of the line? The deaths of 72 migrants recently hardly raised a ripple in the US press but how much longer will that last?
- What is the long term effect on the Mexican economy? Will there be a leveling of income across the border or will the wage pressure continue to send a flood of immigrants north?
- What is the effect on drug legalization deliberations in both countries? Will marijuana be legalized in both countries? Who will control the production and distribution?
- When will the issue make its way into US politics and elections? Will a war being waged just south of the US border affect the next presidential election in 2012?
Tracking, August 2009
August 23, 2009 Filed in: Tracking
Just a few of the many indicators and trends we’re watching closely now:
Mortgage delinquencies – perhaps no other measure shows the painful decline in consumer wealth in the US. We’ve been tracking the delinquency rate well into double digits in many areas of the country as we’re asked to offer economic forecasts as part of almost every presentation. We expect worse before things improve.
There is a side metric related to delinquencies that seems to be critical. When a homebuyer is more than 25% underwater on their mortgage to market value they look carefully at turning in the keys, taking the financial hit, and starting the slow climb back to financial trustworthiness. My smartest financial services clients watch this metric carefully and work hard to keep mortgagees in those homes to preserve their capital, even writing down the loan balance and working out negotiated settlements to do so.
Oil price trends – with a stronger likelihood of an oil price spike sometime in the next 4 years we’re watching for speculation to reenter this market. Supply and demand pressures alone in this sector look like they’ll begin to force prices upward in the 2010-2011 window. Our scenario of not only demand pressures but speculation could bring prices up earlier and spell big trouble for consumers in developed nations, prices on all goods that require transportation, the economies of oil-importing nations, and the return of greed on the part of sovereign wealth funds.
The “S-word.” It’s not just the environment any more that is seeing burgeoning use of the term sustainability. There are a number of definitions floating around but they all boil down basically to “long term balance.” The UN uses a definition of “meeting the needs of today without jeopardizing the needs of future generations.”
I’m now seeing “sustainability” extend from environments to economics, strategies, capital investing, organizational history, and even marketing. Being able to demonstrate to your stakeholders that you’re not jeopardizing the future with your present actions is going to be an important measure at all levels of human endeavor over the coming years.
There is a side metric related to delinquencies that seems to be critical. When a homebuyer is more than 25% underwater on their mortgage to market value they look carefully at turning in the keys, taking the financial hit, and starting the slow climb back to financial trustworthiness. My smartest financial services clients watch this metric carefully and work hard to keep mortgagees in those homes to preserve their capital, even writing down the loan balance and working out negotiated settlements to do so.
Oil price trends – with a stronger likelihood of an oil price spike sometime in the next 4 years we’re watching for speculation to reenter this market. Supply and demand pressures alone in this sector look like they’ll begin to force prices upward in the 2010-2011 window. Our scenario of not only demand pressures but speculation could bring prices up earlier and spell big trouble for consumers in developed nations, prices on all goods that require transportation, the economies of oil-importing nations, and the return of greed on the part of sovereign wealth funds.
The “S-word.” It’s not just the environment any more that is seeing burgeoning use of the term sustainability. There are a number of definitions floating around but they all boil down basically to “long term balance.” The UN uses a definition of “meeting the needs of today without jeopardizing the needs of future generations.”
I’m now seeing “sustainability” extend from environments to economics, strategies, capital investing, organizational history, and even marketing. Being able to demonstrate to your stakeholders that you’re not jeopardizing the future with your present actions is going to be an important measure at all levels of human endeavor over the coming years.