Tuesday 22 February 2011

Oil Crisis on the Way

As Libya moves towards possible Civil War it is really starting to motor on the fear factor in the Oil Markets. Brent Crude which is used as the benchmark for 70% of trade is up very sharply over the past few days and now at over $107 per barrel.

At over $100 per barrel the price of oil starts causing big dislocations in World Economies. The price of transport goes up and causes inflation, the prices of goods have to go up as retailers can't hold down the rate of margin erosion.

Worse in this case is that the US Dollar will be used as a safe haven. Gold and Silver have gone up, but are not steadying out, albeit at high levels. With a strong dollar and rising oil prices there is no cushion for the World Economy.

As well as hoping the War in Libya can be avoided with Qaddafi leaving for the sake of the people involved, we need the situation to calm down or else the UK and Europe will be pushed back into recession. It maybe that this is the price we will have to pay in the short-term for the benefits of Freedom to accrue to the Mid East in the long-term.


John Thomas said...

We have been through this sort thing at the turn of this centuary, and it was only some very anoyd people picketing refineries and making themselves felt by B'Liar and co that price esculators and tax rises were put in abayance, so Gideon and Cammers could themselves be having the same welcome as B'liar, Broon, Pezzy & co received in and when they walk abouts.

Ben said...

I am very concerned about this escalation of violence in Libya and the wider Middle East.

There is no doubt that the various QE excercises taken by key central banks have created the illusion that everything is largely back on track, but the truth is that although this may be true for financial assets, the rest of the real economy is beginning to look very fragile.

Looking at the seemingly unstoppable stock market it would be easy to overlook a housing market that is really struggling despite base rates at record lows and a retail sector that continues to be an incredibly tough place to do business. Behind all this is the backdrop of rising inflation making maintaining a decent standard of living increasingly difficult.

Since it is obvious that the world has not learned the lesson of the credit crunch my fear is that the problems in the Middle East will trigger a second crunch which may well be worse than the first as the cure for debt addiction will occur whether we like it or not.

Anonymous said...

the oil drum had a number of scenarios with regard to the end of cheap oil, to wit a spike in the oil price would cause a recession. lowering demand, bringing the price down, then the economic recovery would push the price back up, causing a recession...
I'd say that that is what is happening, better get used to it.

Dick the Prick said...

I think someone should do some analysis as to how much middle east reform costs in the medium to long term. Prima facia I reckon it's a good thing but the transition's gonna take a while and cost a bit. Oil prices seem to have gone a bit silly though but I guess there are a few nightmare scenarios out there which need costing. Interesting.

Ghaddafi's an odd chap but my money's on him staying. Not confident at all.

Timbo614 said...

A Gaddafi speaks it is not looking good on the Libya front.
The cost of civil breakdown to the people there will be enormous in deaths (not just those killed in the revolution) and in cash terms if the oil stops flowing. As in the saying "we live 3 meals from anarchy" this is possibly about to happen in Libya.

To us a (hopefully) temporary hike in fuel prices. Short to medium term humanitarian aid will probably cost us more.
Long term it's time to pay the piper(s) - we have taken the oil and paid the regimes for it. Now it time to talk about the consequences of looking after our (now apparent) short term interest rather than promoting our principles - the TRUE cost of the oil.

Concerned (again) Timbo.

Bill Quango MP said...

Rember having a conversation with CU a few weeks before Tunisia.
About how oil was pushing up food prices so creating hunger in the oil producing countries.

I remember part of that discussion was 'the papers are getting agitated at Cameron's fuel duty escalator and will the government add another penny to fuel ion April.'

"What if the price rose £1 a litre?
Overnight it went up by £1. Then by another £2.25 the following week. How would the country cope with such a shock? It happened before in the 1970's. 1973 4x price hike.

Rationing was the answer to the oil crisis then, although not introduced. {plans were well advanced.}

But that was before the suburbs and record distance commuting, unprecedented road haulage, courier internet deliveries and two car households?
How damaging would it be now? where would all the car drivers go? on the buses?

Timbo614 said...

BQ - I remember it - not because of the sudden new expense (I got company petrol), but the blanket 50 MPH speed limits to save fuel:

"Speed limits on motorways will remain 70mph (112kph), but on dual carriageways they will become 60mph (96kph), and on all other roads 50mph (80kph)."

only the 50 on "other roads" was ever lifted (to 60).

The old Jag would have to go (attn: ND - I don't do many miles - it's not part of my "renewable experiments"). I would have to get another Twingo:( In comparison, a Twingo doesn't seem to need fuel.

What everybody else does - I hate to think, there are no jobs just down the road any more, as you say. But it would do wonders for the sales of electric cars and solar panels to charge them with!

Timbo614 said...

P.S. The link I used is interesting too:


Budgie said...

The people of the mid-east are not interested in western democracy; they don't want to be in truck to the Great Satan and the Little Satan (that's us); and they don't want corruption. They want an Islamic state, and they will get one. The new Islamic states will play with the oil production to hit the west. BP was right, after all. And I wonder what will happen in Iraq now?

Steven_L said...

I've just sold my car and live 10 minutes walk from work now. So I'll be alright I guess?

As for all this 'we bought their oil' and 'they want an Islamic state' stuff - remember this:

If the west don't export food to them they get very hungry - simple as - if they threaten us we can starve them.

Let them have an Islamic state, western gvts will lay the law down to whichever scum rises to the top.

Timbo614 said...

So you are going to starve them out - yeah - "Great" Britain/USA strikes again, Impressive. Medieval come to mind.

Maybe it will be China or Russia or Iran that "breaks the siege" ... then what?

Dictators and megalomaniacs threaten us - I'm not so sure that the man in the street - in ANY country (Islamic or not) is actually all that interested in threatening us.... Scum. There is scum wherever you look. Banker scum, political scum, unemployed scum. Fundamentalist Power-seeking scum (your ones).
A better 21st century decision would be: stop needing the oil.

Nick Drew said...

@Timbo: A better 21st century decision would be: stop needing the oil

at $150+ the decision will be an involuntary one: we won't need (as much of) the oil

elasticity starts high, at the margin: then becomes inelastic (very high utility value of oil for certain uses): but eventually kicks back in again as wholesale substitution + lifestyle changes take hold

don't underestimate what becomes possible at $200 - even bloody windfarms become economic !

Steven_L said...

Tim, it's not a siege, it's a trade. Food for oil.

alan said...

Budgie - Not convinced. Iran had a nice little democracy going until operation ajax. Operation cyclone in Afghanistan radicalised a lot Muslims.

Its easy to forget how much of this mess we started.

I hope Cameron had his recent speech vetted by our lawyers... Fessing up is laudable, but not necessarily a good idea.

Timbo614 said...

I know, I was making a point. Starved and civil war torn to death populations don't need to trade. They are dead. The survivors would not touch our trade with a camel prod.

@ND - thanks, I sense a compromise :)

Steven_L said...

The survivors would not touch our trade with a camel prod

Regime change?

Who knows what will happe, but the key will be the 2012 US elections. Some of the people after Obama's job make Dubya look a tad moderate.

CityUnslicker said...

Alan, I dispute we started Afghanistan, the taliban hosted Al-Qeda which is backed by extremeists in the Arab peninsula.

of course the West has got its policy wrong in terms of backing dictators; but islamic fundamenalism is not a threat created by the West.

Dick the Prick said...

It's all a bit of a game changer - apparently the Chinese are a triffle worried but I put perhaps too much faith in the committee system. It may sound a tad trite but it does just seem to have just sprung up out of nowhere, really. Good on Tunisia I guess. Good telly.

alan said...

CU - Yes fundamentalists have always existed and we didn't create the idea. I wasnt suggesting we started Afghanistan (taliban version), it is a legacy of the cold war, that others have exploited.

When the USSR invaded Afghanistan we supported the mujahideen, and we had a deliberate policy of promoting radical Islam. The CIA, MI6 & ISI were bedfellows during the USSR invasion, although the ISI did have their own agenda too. After the war the mujahideen moved to Pak and modern al-qaeda was born. Afghanistan reverted back to its (extremist) pre PDPA days.

CIA covert ops were not just limited to Afgan, they also helped radicalise Muslims in the Ukrainians and other USSR border countries in the hope of destabilising those countries and the USSR.

The west didn't create Islamic fundamentalism, but the CIA poured fuel on that fire in the name of the cold war.

The original point I was (badly) trying to make, is I reject the idea that Muslims are nut jobs by definition. Demonising a religion is a bad idea and historically ends in bloodshed.

Christian fundamentalism in the US has been growing in recent years, in part, fuelled by anti-Muslim rhetoric. If we (the people of earth) continue down this road its going to make ww2 look like a minor disagreement.

Anonymous said...

CU "I dispute we started Afghanistan, the taliban hosted Al-Qeda which is backed by extremeists in the Arab peninsula

Time to learn your history, CU.

loveandtheplanet said...

"Worse in this case is that the US Dollar will be used as a safe haven. "

I see what you mean.
As oil is priced in US Dollars, sometimes its price rise indicates the dumping of the US Dollar (because of US Quantitative Easing, nobody actually wants to DEPEND on it any longer as a Reserve Currency). In the current case of MENA instability where the US Dollar is regaining some safehaven status, the oil price rise is more related to real supply and demand pricing.