It is not the prospect of a global recession some say is lurking as evidenced by the recent sharp drop in crude oil prices. As I have said before in kortsessions, I simply don’t buy this. Lower oil prices are a huge benefit to for everyone on the planet not involved in production or supporting the production of crude oil.
What does bother me is the unforeseen consequences of the continual, intentional over-production of crude oil by Saudi Arabia and the cavalier attitude they have taken on their policy. This is evidenced by statements like, “Why should we cut? Why?”–Ali Al Naimi, Saudi Oil Minister. This statement was made December 11, 2014, as the price of West Texas Intermendiate closed below $60/barrel. As of this post it was $48.36.
“Why should we cut?”
Because you are destabilizing an already unstable world!
In particular, Russia, which is already reeling from sanctions leveled on their incursion into the Ukraine, needs (according to BloombergBusiness Week) “$100 per barrel (to sustain itself): Its budget loses $2 billion for every dollar it drops below that price … ” We are below $50 today and the Russian economy is severely wounded. Like a wounded animal, these low oil prices might drive their fearless (somewhat unpredictable) leader to lash out with other military diversions to move the Russian public’s attention away from their economic woes.
And Russia is not the only potential hot spot. Others include Libya, Egypt, Iran, Iraq and Venezuela … all unstable and potentially able to turn their maleficence back on the Saudis. Bottom line: I think in their attempt to exert economic punishment on Russia and Iran, retain market share and shut down the U.S. shale oil boom, the Saudi’s are playing a dangerous game of ‘chicken’, where they could unleash dangerous consequences on a regional and, maybe, global basis. This is what worries me and I’m not sure the market, with its constant short-term focus, is even close to this worry.
What is your opinion?
A parting shot at economic weakness
Here is on last thought for those still worried about the equation: Falling Oil Prices = Global Weakness and a falling market. Ben Levinsohn’s Streetwise column in this week’s (1/12/15) Barron’s (“Plunging Oil: What the past tells us”) makes a pretty good case to the contrary.