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The Financialized-Oil Dominoes Are Toppling
(December 12, 2014)
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):
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Are you like me? Ever since my first summer job decades ago, I've been chasing financial security. Not win-the-lottery, Bill Gates riches (although it would be nice!), but simply a feeling of financial control. I want my financial worries to if not disappear at least be manageable and comprehensible. And like most of you, the way I've moved toward my goal has always hinged not just on having a job but a career. You don't have to be a financial blogger to know that "having a job" and "having a career" do not mean the same thing today as they did when I first started swinging a hammer for a paycheck. Even the basic concept "getting a job" has changed so radically that jobs--getting and keeping them, and the perceived lack of them--is the number one financial topic among friends, family and for that matter, complete strangers. So I sat down and wrote this book: Get a Job, Build a Real Career and Defy a Bewildering Economy. It details everything I've verified about employment and the economy, and lays out an action plan to get you employed. I am proud of this book. It is the culmination of both my practical work experiences and my financial analysis, and it is a useful, practical, and clarifying read. Test drive the first section and see for yourself. Kindle, $9.95 print, $20
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Gordon Long and I discuss The
New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube)
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