Will the Price of Oil be a Game Changer?

First it’s Tunisia.


Then Egypt.

And now Libya.

What makes Libya different from a market’s perspective is that we are now

talking about an oil exporter in the sudden grips of political upheaval.

In this domino game, the next critical country we have to keep an eye on is

Bahrain. It is home to the U.S. Navy’s 5th Fleet. A new regime there could in turn

seriously impair America’s ability to patrol and monitor developments in the

Persian Gulf and surrounding areas. Bahrain is ruled by a Sunni monarchy and

yet the majority of the population is Shiite (and Art Cashin at UBS says that there

is Iranian intelligence that has been planted within the civilian population).
 
 
Saudi Arabia has the capacity to fill the void left by Libya, but that misses the


point. The risk of further unrest is rising, especially with sectarian issues in full

force in Bahrain. This means that oil prices at a minimum will retain a

geopolitical risk premium — most oil experts now peg this at $10-$15 a barrel. If

countries start to stockpile more crude in light of current events, one can expect

the oil price premium to rise even further even if the situation calms down

overseas. So no matter what, barring a sudden downturn in demand, and the

one thing about oil (food too) is that demand is relatively inelastic over the nearterm,

the risk is that we will see further increases in the price of crude even from

current lofty levels.

So the bottom line is that there is still more near-term upside potential than

downside risk for the oil price (and most energy stocks). This then will act as a

tax on consumers and as a margin squeeze for non-oil producers and only when

global demand sputters, as it did in the summer of 2008, will the oil price break
down — although it is likely to settle in a new and semi-permanently higher range


as it did coming out of the global credit collapse.

I believe we are getting closer to the point where the surge in oil prices could tip

the global economy back into recession (we may have already reached that

point anyway). My reading of Wall Street research shows that the trigger point for

recession calls would be somewhere around $120 a barrel. As it stands, both

the move in the oil price on a two-year basis and the current level in real terms

suggest that the “odds” based on past performance would certainly be better

than 50-50 as it pertains to the U.S. economy in any event.
 
Exerpt from David Rosenburg, G-S
 
 
 
 
 


About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly.   Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses.  In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example. saverio manzo

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