How The Collapse In The Price Of Oil May Precipitate A Debt Crisis And War

Raúl Ilargi Meijer, The Automatic Earth: (Re-)Covering Oil and War

The first thing that popped into our minds on Tuesday when WTI oil briefly broached $30 for its first $20 handle in many years, was that this should be triggering a Gawdawful amount of bets, $30 being such an obvious number. Which in turn would of necessity lead to a -brief- rise in prices.

Apparently even that is not so easy to see, since when prices did indeed go up after, some 3% at the ‘top’, ‘analysts’ fell over each other talking up ‘bottom’, ‘rebound’ and even ‘recovery’. We’re really addicted to that recovery idea, aren’t we? Well, sorry, but this is not about recovering, it’s about covering (wagers).

Same thing happened on Thursday after Brent hit that $20 handle, with prices up 2.5% at noon. That too, predictably, shall pass. Covering. On this early Friday morning, both WTI and Brent have resumed their fall, threatening $30 again. And those are just ‘official’ numbers, spot prices.

Read more ....

WNU Editor: If you want to read up on a Doomsday scenario because of the collapse in oil prices .... this article is for you.

Hat Tip to Zero Edge for this link.

How High Will The Price Of Oil Will Go If There Is War Between Saudi Arabia And Iran?

A U.S. Army soldier walks towards a burning oil well in Iraq`s vast southern Rumaila oilfields March 30, 2003. REUTERS

James Stafford, OilPrice.com: War Between Saudi Arabia And Iran Could Send Oil Prices To $250

The rift between Saudi Arabia and Iran has quickly ballooned into the worst conflict in decades between the two countries.

The back-and-forth escalation quickly turned the simmering tension into an overt struggle for power in the Middle East. First, the execution of a prominent Shiite cleric prompted protestors to set fire to the Saudi embassy in Tehran. Saudi Arabia cut off diplomatic relations and kicked out Iranian diplomatic personnel. Tehran banned Saudi goods from entering Iran. Worst of all, Iran blames Saudi Arabia for an airstrike that landed near its embassy in Yemen.

Saudi Arabia’s Sunni allies in the Arabian Peninsula largely followed suit by downgrading diplomatic ties with Iran. However, recognizing the dire implications of a major conflict in the region, most of Saudi Arabia’s Gulf State allies did not go as far as to entirely sever diplomatic relations, as Saudi Arabia did. Bahrain, the one nation most closely allied with Riyadh, was the only one to take such a step.

Read more ....

WNU Editor: A war between Saudi Arabia and Iran will send oil prices through the roof. And while this will bring great pain to the world's economies .... the boost in developing and marketing alternative energies, shale development, oil exploration at home .... all of this will also boom, and will probably in the long round bust our dependence on oil cartels like OPEC.

This Is How The U.S. Can Use The Oil Weapon To Cripple China

Photo Credit: iStockphoto

Tingbin Zhang, Zero Hedge: China’s Worst Nightmare - The US’s Oil Weapon

China’s islanding building on the four-mile-long and two-mile-wide Subi Reef in the South China Sea has put The US in a tight spot. To protect its ally from China’s aggression, The US will be left with little choice but to constrain China by military means. However, the US won't directly engage China in the war in the foreseeable future, because the US dominates China with its superior naval and air force and the only way for China to level the playing field is to apply nuclear weapons. The nuclear nature of Sino-American warfare will make both the world no.1 and no.2 economy the fallen giants.

So there is a possibility that The US might use its oil weapon instead to strike at the core of China’s weakness - it’s huge dependence on oil import. At the moment, China imports 55% of its oil, almost half of which sails from countries in the Persian Gulf?which accounts to 5.3 Million Barrels per Day and is around 75% of Saudi Arabia’s production. As a matter of fact, China’s reliance on Middle Eastern oil has gradually grown in line with its rapid-increasing demand for oil. Right now, China has achieved the equivalent of the peak of U.S. Oil import dependence and is not slowing down a bit. The single largest source of China's crude oil imports is Saudi Arabia.

WNU Editor: Energy has always been China`s Achilles Heel. But cutting off oil supplies from the Persian Gulf will impact everyone .... not only China.

Cheap Oil Is Sverely Impacting These African Nations

Reuters / David Mdzinarishvili

Peter Dorrie, Real Clear World: Where Cheap Oil Is Seriously Bad News

Crude oil has hit rock-bottom prices, and several African countries are getting the worst of it. Algeria, Libya, Nigeria, Chad, Angola and South Sudan are among the most oil-dependent economies in the world.

At the same time, these countries are facing some of the world’s most intractable security problems, and are relying on their petroleum-funded militaries to an extraordinary degree.

Nigeria and Chad are battling the Boko Haram insurgency and various other internal and external security threats.

Algeria and Angola are veritable dictatorships run by their military establishments. And Libya and South Sudan are embroiled in civil wars in which access to income from oil rents plays an important role.

WNU Editor: Even if oil was super expensive .... I doubt that these conflicts would be ending. In fact .... I can easily see some of these conflicts exploding to a level that would make today's battles trivial in comparison.

The Connection Between Oil Prices And Social Unrest

Oil Prices And Social Unrest -- Kevin Rafferty, Japan Times

HONG KONG — The resignation of Hosni Mubarak after a 30-year reign as modern-day pharaoh of Egypt has demonstrated the nervous and potentially combustible connection between oil and politics in the Middle East. As soon as Mubarak quit after weeks of demonstrations, oil prices dropped, but quickly rose again, and benchmark Brent crude touched $103 a barrel as new political protests erupted in Bahrain and Iran amid certainty about who would really rule Egypt.

Read more ....

My Comment: A sobering assessment on how much the world is dependent on oil from Arab countries, and how unrest and revolution in that part of the world can have a pronounced impact on oil prices and on the world economy as a whole.

Liquid War: Welcome To Pipelineistan

From Asia Times:

What happens on the immense battlefield for the control of Eurasia will provide the ultimate plot line in the tumultuous rush towards a new, polycentric world order, also known as the New Great Game.

Our good ol' friend the nonsensical "global war on terror", which the Pentagon has slyly rebranded "the Long War", sports a far more important, if half-hidden, twin - a global energy war. I like to think of it as the Liquid War, because its bloodstream is the pipelines that crisscross the potential imperial battlefields of the planet. Put another way, if its crucial embattled frontier these days is the Caspian Basin, the whole of Eurasia is its chessboard. Think of it, geographically, as Pipelineistan.

All geopolitical junkies need a fix. Since the second half of the 1990s, I've been hooked on pipelines. I've crossed the Caspian in an Azeri cargo ship just to follow the $4 billion Baku-Tblisi-Ceyhan pipeline, better known in this chess game by its acronym, BTC, through the Caucasus. (Oh, by the way, the map of Pipelineistan is chicken-scratched with acronyms, so get used to them!)

Read more ....

My Comment: Oil and energy is the circulatory system for the industrial world .... and the one thing that I have learned from history is that the big wars and conflicts have always revolved around where to get it, and how it was shipped.

As this resource becomes more expensive to obtain .... and as the world develops an even greater insatiable appetite for it .... one can only expect that more conflicts and wars will come from it.

Oil And Conflict -- The Cost Of Doing Business

(Photo from The-Diplomat)

Nigerian Conflict A Warning For Big Oil In Iraq
-- Yahoo News/AP

BAGHDAD - Recurrent violence in oil-rich parts of Nigeria may provide a sobering lesson for oil companies hoping to work in Iraq — a place that is much more dangerous despite the fact that attacks are at their lowest level in more than four years.

Representatives of 35 international oil companies will meet with Iraqi government officials in London on Monday to discuss the bidding process for eight enormous oil and gas fields. If the contracts are approved, they could lead to the biggest foreign stake in Iraq since the industry was nationalized more than 30 years ago.

About 4,000 miles from Baghdad, oil companies are doing damage control in Nigeria — arguably the most dangerous place in the world where firms like Royal Dutch Shell PLC and Exxon Mobil Corp. currently operate.

Three years of attacks in the country's Niger Delta have cut oil production from 2.5 million barrels per day to around 1.5 million — demoting Nigeria to Africa's second largest oil producer behind Angola.

Read more ....

My Comment: Every country has political, economic, social, cultural and historical factors that will make it a success or failure in the oil industry. But the most important factor for success has always been the expertise and knowledge that the major oil companies can bring in developing and exploiting this resource. If the major oil companies are not there .... problems that include declining oil production, pollution, dysfunction on a managerial level, coupled with instability have always been the result.

Iran's oil infrastructure is failing, along with a decline in oil production (they must import gasoline and diesel for their vehicles). Mexico suffers from horrendous pollution .... environmental toxic hot zones around their major oil facilities. Venezuela's production facilities are breaking down, resulting in oil production that has been steadily falling down for he past few years. Russia has failed in exploiting new gas and oil fields in Siberia. They have bought the technology, but they do not have the professional staff to take advantage of this technology.

Brazil works in cooperation with major oil companies .... the result has been discoveries offshore. Canada's tar sands are being developed solely from the expertise and R&D from the majors .... this growth will continue for years. Angola has arranged royalty and development arrangements with the majors .... it is now the number one producer of oil in Africa.

The 20th and 21rst century will always be remembered for many things ..... oil and war will be one of them.

Oil Supply And Prices -- Biggest Threat To World Peace

From The L.A. Times:

Maybe he was just playing politics, painting himself as a hawk to take on his battered rival. Maybe he was revving up the world for war against the country of his birth.

In any case, an Israeli cabinet minister's remark calling a war against Iran "unavoidable" has had global repercussions, sending oil prices to record highs and drawing condemnation today at the United Nations and by the chief of the International Atomic Energy Agency.

Read more ....

My Comment: The remarks that were made by an Israeli Cabinet Officer was enough to send prices for oil to record levels ... imagine if Israel actually bombed Iranian nuclear sites. Such an action will result in $200/barrel.

But the question needs to be asked .... in the event of $200 per barrel will this price last, and what are the security/war/instability issues that will arise. In the immediate term, Iranian production will be impacted, and their surrogates will be active throughout the Middle East and abroad. Some countries may even openly sympathize and restrict oil exports, Venezuela is one country that comes to mind. But a few months later, oil exports will resume to the same level as before. While many countries are dependent on oil imports, the oil exporters are dependent on their oil revenues to fund their governments. Interruptions hurt everyone in the long run.

But it is in the short term that pain will be felt by everyone, and the danger of escalation presents itself. In particular .... for the world's poor and the fast developing Asian giants. Countries such as India and China are now developing a foreign policy that revolves around obtaining oil and resource products at any cost. Any price instability or product limitation will make these governments openly antagonistic to anyone that is responsible for disrupting their supply. What threats they will use when so many millions of their citizens are suffering ... your guess is as good as mine.

Oil And Wars -- Part 2

For the past year the world's focus has been on the price of oil, its growing scarcity, its impact on the cost of food and the world economy, and the political instability and wars that it is causing.

The following article and analysis from The Telegraph suggests that everything may change:

Oil's perfect storm may blow over
The perfect storm that has swept oil prices to $132 a barrel may subside over the coming months as rising crude supply from unexpected corners of the world finally comes on stream, just as the global economic downturn begins to bite.

The forces behind the meteoric price rise this spring are slowly receding. Nigeria has boosted output by 200,000 barrels a day (BPD) this month, making up most of the shortfall caused by rebel attacks on pipelines in April.

The Geneva consultancy PetroLogistics says Iraq has added 300,000 bpd to a total of 2.57m as security is beefed up in the northern Kirkuk region.

"There is a strong rebound in supply," said the group's president Conrad Gerber.

Read more ....

Previous Post: Oil And War Part 1

News From Other Sources:
Oil prices pass US$135 a barrel after report of supply drop -- Oil Week
Oil Prices have to rise further -- Blog Activ
World stocks hurt by 135-dollar oil -- Breitbart
Democrat's Plan to Sue OPEC Does Not Bring Down Gas Prices -- Gateway Pundit

My Comment: Many countries are gearing up their oil production. But with the rest of the world rushing to develop their societies to the standard of the West, and oil being the essential fertilizer for this growth, production will not be able to meet future demands. The reasons why we find ourselves in this predicament are simple. Governments and politicians do not find oil. Oil companies are the ones who are the specialists in this area.

Countries that have nationalized and taken over their oil industries .... or countries that have made the decision like the U.S. to limit the development of their oil supplies .... will over a period of time find their position strongly dependent on other countries for their needs.

Iran cannot produce enough gas to feed their needs. Pemex of Mexico has produced an environmental nightmare for its citizens. Venezuela's oil production has collapsed to half of what it use to be. Corruption in Nigeria has fueled a civil war because the people who live on the land that has the oil are not benefiting from it. The same can also be said about Sudan.


It is no surprise that when you look at the above graph, it is the countries that permit a healthy environment for oil exploration and development are the ones who are increasing production (Yes I know about Russia ... but even with its past disagreements with foreign oil companies, they are now there).

Will wars decrease if the price of oil goes down .... my answer to that is a no. Countries like Venezuela, Iran, and Russia are now heavily dependent on the revenues that oil produces. Any decrease in the price will mean less revenues for these governments, and even lesser money to dole out to their expectant citizens. When a people have high expectations, and when these expectations are not met .... the reaction can get ugly.

Oil And War

Today's headlines:

Oil crosses $129 for first time, heads for $130 -- Yahoo News
Oil Rises to a Record After Pickens Says Prices May Reach $150 -- Bloomberg
Opec says oil could hit $200 -- Financial Times
America must face the harsh realities over oil -- Times Online
Every recent post by the blog .... The Oil Drum .... a website that I find incredibly informative and accurate in their forecasts .... paints a very dire picture of oil prices and availability.

With all of these headlines, I then come across this report which makes the following prediction: Oil Future and War Now: A Grim Earth Sciences’ Point of View.

Summarizing, the report says the following:

Worldwide per-capita oil consumption is closely correlated with the standard of living. In developing nations like China and India increasing prosperity therefore requires increased per-capita oil consumption. However, oil is a finite resource whose production globally is about to begin to decline irreversibly. Consequently the growing demand for oil is leading to a growing global conflict in which the Gulf War, the 9/11 attack, and the war in Iraq are just the first three skirmishes. These skirmishes pale in comparison with the looming potential conflict over oil with China.

The complete report in pdf is here.

My Comment: Oil is the lifeblood of our civilization today. It is unfortunate that much of the world's reserves today are in the most unstable of countries. I personally do not believe that shortages of supply and price hikes will precipitate an immediate war, instead I can easily forsee a slow bleed in which falling living standards, economic dislocation, and rising internal tensions in countries that are most vulnerable to oil shocks ..... China and India just to name two ..... can easily escalate over a period of months to a year or two into a major conflict.

My hope is that energy alternatives will become more economical and preferable to oil as it and its byproducts become more scarce and expensive. My fear is that governments ..... always responding to crisis with short term goals in mind ..... will respond in a manner that will make a terrible problem worse.

Other useful articles and links on oil, its future, and consequences for war are the following:
The Oil Drum -- An informative site that discusses energy issues and our future.
The Undeclared Oil War -- A 2004 Washington Post article discussing Japanese and Chinese competition for oil resources.
Oil And War -- A prophetic and informative article from 2003 (John Robb's Weblog).
Oil Wars -- A book by Mary Kaldor , Terry Karl, Yahia Said. The link goes to Avaxhome where it can be freely downloaded.

Why Oil Wealth Fuels Conflict

From Real Clear Politics:

The world is far more peaceful today than it was 15 years ago. There were 17 major civil wars -- with "major" meaning the kind that kill more than a thousand people a year -- going on at the end of the Cold War; by 2006, there were just five. During that period, the number of smaller conflicts also fell, from 33 to 27.

Despite this trend, there has been no drop in the number of wars in countries that produce oil. The main reason is that oil wealth often wreaks havoc on a country's economy and politics, makes it easier for insurgents to fund their rebellions, and aggravates ethnic grievances. Today, with violence falling in general, oil-producing states make up a growing fraction of the world's conflict-ridden countries. They now host about a third of the world's civil wars, both large and small, up from one-fifth in 1992. According to some, the U.S.-led invasion of Iraq shows that oil breeds conflict between countries, but the more widespread problem is that it breeds conflict within them.

Read more ....

My Comment: Oil broke the $126.00 US barrier today. The political culture of many oil producing countries will not permit them to adopt Western Government strategies and policies when it comes to their oil wealth and cash flow. This in the short to medium term will result in lesser oil production, higher prices, and a search for alternative supplies and energy sources.

The real problem will arise when oil prices start to collapse .... which historically has always happened when the price of oil has increased as substantially as it has in the past two years. Countries such as Russia, Venezuela, Iran, and Mexico are heavily dependent for most of their revenues from oil royalties and earnings. Any disruption in this flow of funds will bring about turmoil, collapse of government price supports for basic staples, and an atmosphere of blame and finger pointing.