The Geopolitical Risks Of $40 Oil}

Submitted by: Vancouver Financial

Oil is fast approaching $40 a barrel, and to most people, this is nothing more than good news at the pump, but most people dont understand the devastating damage to nations and companies when oil is this cheap. $40 oil is not a tax break or a consumer boon, its a geopolitical event.

When the price of the worlds most important commodity becomes unstable and crashes over 50% within 6 months, never assume its a random event. Its not. Were talking about a multi-trillion dollar market which has numerous feeder industries which are also in the trillions of dollars of revenues each year. That means entire nations are supported, strengthened, or brought to their knees, depending on the price of oil. Therefore, crashing oil to $48 a barrel(at the time of writing)is considered a serious attack by certain leaders and nations.

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Not only nations, but internally, industries are buffeted and this causes conflicts even within nations like the US. What occurs is a lack of stability and random events which we can call blowback or revenge. At the highest levels, leaders of nations and companies are not fooled by the silly rhetoric of the evening news telling people what a great thing $48 oil is. These people understand the fallout and enormous financial consequences of wiping out trillions in capital, most of which was used to underpin debt, projects, or a credit rating. Oil isnt just a product, its capital, its equity.

So when a nation or company has 55% of its capital wiped out, they get mad, and they want revenge. Right now, there are nations feeling exactly this way. Some matter, some dont, depending on the power of their military and size of their economy. Everyone knows Russia is a target of the oil price decline, but the damage to many other nations like Venezuela, Holland, U.K. and others cant be ignored.

Right now, these nations and companies are biding their time, eating the losses, and hoping it ends soon, real soon. But when it doesnt end soon, and I can tell you without a doubt that it wont, counter moves will begin to be made. These entities have to protect their livelihoods and they will do whatever they feel is necessary to accomplish that. I would even include war as a real possibility.

Besides these dire risks, long term cheap oil is also destabilizing for economies which produce oil. Production of oil is one of the most capital intensive industries in the world, and therefore is a very strong economic driver, requiring engineers, to construction, trucking, refining, to accountants, lawyers, and financial service companies. Oil is a tremendous wealth creator. Its estimated that $1 of oil revenue drives $5-$8 of economic activity. Very few, if any, industries can make this claim.

If oil doesnt rise to at least $80 within a few months, you can expect to start seeing instability in markets, geopolitics, and economies, first with oil producers, and then around the world. It doesnt matter if you work in oil and gas or not, you will be affected, either sooner or later, to a great degree or a lesser degree.

About the Author: Michael Yates is a financial advisor at Wealth Management Vancouver.


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