625: USA Policies and the Oil Price
Oil Prices Drop From Highs: The good news for property investors in most western countries is that the oil prices have dropped around 10% in the last week to around $71/bbl after testing $80/bbl. Of course higher oil prices act like a giant tax on countries – slowing their economies and increasing inflation, leading to higher interest rates and weaker currencies for non oil producing nations. The effects of higher oil prices start to affect economies around 6 months after they go up. Oil price rose sharply in January – so we are starting to see some countries struggling and economies slowing – as is also often the case in summer months in any case.
Sanctions: We think this drop in oil prices is temporary, because by early November, sanctions against Iran start in earnest and the USA is putting severe pressure on all countries to reduce their Iranian oil imports to zero before early November. Saudi Arabia and other big exporters like Russia and the USA are pumping like mad making up for the potential shortfall, but despite this we expect a tightening of the market by Oct-Dec 2018.
US-Russian-Saudi-Israeli Alliance: It’s probably prudent to describe the overall global economic collusion between USA, Russia and Saudi Area – the three big oil producers each flowing around 11 million bbls a day – to gain oil production market share at the expense of Iran – which is likely to see its production crash from around 3 million bbls/day to may be 1.5 million bbls/day, of which it uses around 0.8 million bbls/day itself – leaving exports of a meagre 0.7 million bbls/day, down from 2.3 million bbl/day. The overall US objective is to cripple the Iranian economy - cut off its funding for its military activities. This is the strategy Bolton, Pompeo and Trump – who have also likely agreed this strategy with President Putin and Prince Salmon of Saudi. This being punishment for Iranian proxy military interventions around the Middle East, notably Syria and Yemen – which is viewed as a threat to both Saudi Arabia and Israel. Don’t underestimate the Israeli lobby as well – particularly in places like New York.
Tensions Rising: In summary – we have the USA-Russian-Israeli-Sunni-Arab alliance ganging up against the socialist Shiite Iranian regime. We don’t think this strategy will go away as long as Bolton and Pompeo are advising Trump. And it will likely to lead to far higher oil prices in the next year – with a tightening of the oil market and USA-Russia-Saudi taking oil market away from socialist Iran and Venezuela with the view to harm or ruin both their economies – it’s pretty simple. Unfortunately, it could lead to an all out war with Iran feeling pinned back – no-where to go apart from using a military option – for instance to either blockade or disrupt oil shipments from the Straits of Homez. If a blockade happened even for a day, the US military machine would step in straight away – backed by the Arab alliance.
Oil Consumption Expanding: Oil dropping back to $71/bbls is probably a buying opportunity. All the talk of peak oil demand and electric car revolution is pretty meaningless at this time. The world’s economies run on oil, gas, coal and nuclear – supplemented by renewables. Oil production and demand has been very healthy in the last 5 years – rising from 93 million bbl/day to 100 million bbls/day – at a colossal rate. This is forecast to keep rising despite a big increase in electric cars to around 111 million bbls/day by 2035, another rise of 10%. It could then plateau – but let’s face it – the oil industry is continuing to grow simply because the population is growing and more and more people are flying, need transportation of goods-services and want to drive cars, and not just any small cars – they seem to want gas guzzling huge SUVs, vans and trucks - not little minis and mopeds. As the middle classes expand in places like China, India, Brazil and Africa – people will be diving more petrol and diesel powered cars and bigger cars as their economies expand. The global population is expanding by 2% a year – so the oil consumption should expand by at least 1% a year and energy consumption (that’s total electric-gas-coal-oil-renewables energy consumption) should be expanding at around 2% a year as well. The fossil fuel business is far from dead – in fact its expanding rapidly with gas consumption skyrocketing in places like the USA, India and China – and this is set to continue.
Property Investors Take Note: This is important for property investors to consider because there will be winning countries and losing countries as oil prices continue their recovery and increase – if indeed this continues. Ideally you are best off investing in the “winning” countries and avoiding the countries that might “lose” – in other words their economies slow down-languish and debts rise because of high oil prices.
Lets list them for you:
Losers: In summary, with regard to these oil price and US policy trends – the countries that will be on the decline with his policies will be:
- Possibly China (trade war)
- Qatar that will become more economically isolated because of its alignment towards Iran unless is starts to side with Saudi Arabia/UAE, which is unlikely
- Many of the oil importing African and South American nations will struggle because of the higher dollar value, higher borrowing costs and higher oil prices – some might collapse. Particularly exposed larger counties are South Africa and Democratic Republic of Congo.
- Other countries that could struggle with higher oil prices and higher dollar values against their own weak currencies are India, Pakistan and Bangladesh.
- Libya looks like being in a protracted war with factions fighting over oil export facilities – we don’t expect any improvement soon
- Nigeria despite is oil production is a loser because of its massive young population, corruption and regional civil strife – we don’t expect much change hear either
Winners: The countries on the ascent with the new US policies that also benefit from higher oil prices are:
- Saudi Arabia
- UAE - Dubai
- Possibly Brazil, Angola, Ghana, Oman
- Iraq and Syria settling down after years of war
We hope you have found this Special Report helpful and insightful. If you have any queries, please contact us on email@example.com