We Are So Not Prepared For Another Crude Oil Price Shock

Monday, June 16, 2014
By Paul Martin

By: John Rubino
Market Oracle
Jun 15, 2014

In one sense, energy doesn’t matter all that much to what’s coming. Once debt reaches a certain level, oil can be $10 a barrel or $200, and either way we’re in trouble.

But the cost of energy can still play a role in the timing and shape of the next financial crisis. The housing/derivatives bubble of 2006 -2008, for instance, might have gone on a while longer if oil hadn’t spiked to $140/bbl in 2007. And the subsequent recovery was probably expedited by oil plunging to $40 in 2008.

With the Middle East now lurching towards yet another major war, it’s easy to envision a supply disruption that sends oil back to its previous high or beyond. So the question becomes, what would that do to today’s hyper-leveraged global economy? Bad things, obviously. But before looking at them, let’s all get onto the same page with a quick explanation of why everyone seems so mad at everyone else over there:

The story begins in 570 A.D. in what is now Saudi Arabia, with the birth of a boy named Muhammad into a family of successful merchants. After having some adventures and marrying a rich widow, around the age of 40 he begins having visions and hearing voices which lead him to write a holy book called the Qur’an. More adventures follow, eventually producing a religious/political system called Islam that comes to dominate a large part of the local world.

In 632 Muhammad dies without naming a successor, creating a permanent fissure between the Shi’ites, who believe that only descendants of the Prophet Muhammad should run Islam, and the Sunnis, who want future leaders to be chosen by consensus.

Now fast forward to the end of World War I: British leader Winston Churchill sits down with some other old white guys to draw a series of rather arbitrary lines through the Middle Eastern territories recently captured from the Turkish Ottoman Empire. They name their creations Jordan, Syria, and Iraq and appoint kings to rule them. Unfortunately, the new borders enclose both Sunnis and Shi’ites, along with Kurds and Christians who don’t get along with either kind of Arab Muslim. Shortly thereafter, Israel is tossed into the mix and massive but unequally-distributed oil fields are discovered, pretty much guaranteeing instability for as far as the eye can see.

Since then, the Western powers have been trying to keep the oil flowing by periodically deposing/replacing leaders and making/breaking alliances. All without the slightest idea of what they’re doing. So the situation has gone from really bad in the 1960s and 1970s to potentially catastrophic today as various Middle Eastern dictatorships and terrorist groups plot to create a pan-Islamic “New Caliphate” while secretly developing weapons of mass destruction.

Which brings us to the present crisis: The US, having deposed Iraqi dictator Saddam Hussein and spent a trillion or so dollars trying to create a functioning democracy, has pulled out, only to see the new Shi’ite government oppress the Sunni minority into rebellion. With the help (or leadership, it’s not clear) of Syrian Islamists trained in that country’s ongoing civil war, the Sunnis are on the verge of taking over Iraq, and both the US and (Shi’ite) Iran are being pulled back in — apparently on the same side.

It’s a mess, in other words, and the flow of oil, of which Iraq and Iran produce a lot, is now threatened.

So what would $150/bbl oil mean today? Several things:

The Rest…HERE

Leave a Reply

Support Revolution Radio