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The Financialized-Oil Dominoes Are Toppling

Thursday, December 11, 2014 20:21

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The drop in oil revenues has triggered a self-reinforcing feedback dynamic.

Oil is not just something that is refined into fuel–it is capital, collateral, debt and risk. In other words, it is intrinsically financial. As I noted in The Oil-Drenched Black Swan, Part 2: The Financialization of Oil, oil has been financialized to the point that few outside the industry understand the dominoes that are currently toppling.

Let’s start with the obvious fact that the impact of lower oil is financial, political and geopolitical. Lower oil revenues are negatively impacting:

1. Oil-exporters’ revenues

2. Monetary policy of central banks

3. Trade flows

4. Global financial markets

Lower revenues are pressuring oil-dependent governments such as Russia, Venezuela and Iran, and destabilizing the geopolitical order as weakened oil exporters sink into recession and political turmoil.

Lower revenues are also kicking the financial supports out from under the debt-dependent, enormously capital-intensive oil exploration and development projects in North America.

Simply put, the sharp drop in oil revenues has knocked over a line of financial dominoes whose end is not yet in sight. These issues have been addressed by a number of analysts; here is a small selection of recent stories:

Why US Shale May Fizzle Rather Than Boom (research by Mason Inman)

It’s Different This Time… Rig-Count Edition

Profit Recession On Deck Due To Surging Dollar And Plunging Crude, Deutsche Warns

Bank of America sees $50 oil as Opec dies

Fossil fuels: are we on the edge of the Seneca cliff?

This Time Is The Same: Like The Housing Bubble, The Fed Is Ignoring The Shale Bubble In Plain Sight

Ten Reasons Why a Severe Drop in Oil Prices is a Problem

The drop in oil revenues has triggered a self-reinforcing feedback dynamic. As the financial dominoes fall, there is less capital available to maintain production, so oil output falls, further reducing income. As the collateral,income and impaired debt dominoes topple, risky debt in sectors completely unrelated to oil start falling as institutions trim risk throughout their holdings.

Gordon T. Long and I discuss the highlights of this complex set of issues in this video program, The Oil-Drenched Black Swan (28 minutes):

view it on YouTube

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Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers(25 minutes, YouTube)

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for the full posts and archives.

Source: http://charleshughsmith.blogspot.com/2014/12/the-financialized-oil-dominoes-are.html

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Comments

Total 1 comment

Andor

I agree to some extend but please do further research: Oil (crude) is also A-biotic oil and comes from deep down the earth’s crust called also oil magma. The earth generates oil all the time and the hydro carbons then gets pushed up to shallower reservoirs in which we use to drill. The crude we know is not fossil neither peak oil and there is more than enough oil for thousand of years to come. For example Titan one of Saturn’s moons has oceans of Hydro Carbons and is not connected to any fossils. The problem is crude’s price was hold synthetically high and now it is out of control but will balance itself out with supply/demand. Too much synthetic money and value was put on crude and now they will feel the pain. It is obvious that the demand has gone down. Some place on west coast of Africa, oil was found with a much higher output than Nigeria and Lybia together and why was this capped then? We have come to a stage where demand will control the crude price and that is correct.
A-biotic oil is what they drilled into at the Gulf of Mexico with pressure that cannot be controlled and was straight down into the oil magma.

Dec 14, 2014, 5:26 am 0 Reply

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