Tuesday, January 19, 2016

A war over oil is brewing

I think there will be war in the middle east, and soon. Yes, it will be over oil, but not in the way most would think. I believe there will be war in the middle east to push the price of oil higher. Why? Because if oil stays as low as it is, most middle east countries will go broke and have massive civil unrest as a result. Oil is the life blood to the middle east (and several other oil producers like Venezuela and Nigeria). Without substantial revenues, most oil producing countries can’t provide all the subsidies, services, transfer payments they give their citizens. When that happens the citizens will revolt and riot threatening the ruling elites. That will not be allowed and war is the only option left to the elites to safe their positions. So war is brewing and will boil over. And that will probably be sooner rather than later.

What do you think?

Monday, January 18, 2016

Is oil the next sub-prime mortgage debacle?

As I look over all the stories about the price of oil I was surprised to find out how leveraged the industry is. What happens if most of the loans to oil related companies are defaulted on? What happens if many of the oil related companies file for bankruptcy protection? What kind of exposure do banks have to these loans that were once “risk free” and are now basically “junk”? I think this all could turn out to have a major impact on our economy just as the debacle with sub-prime mortgages had in the last financial crisis. As the price of oil stays low (or goes lower) we can expect a wave of defaults and bankruptcies across the oil industry that will have a serious negative impact on banks and other financial institutions. I think we can see another “Lehman” event occurring in the near future all because the price of oil has fallen so low. How would have ever thought that this could happen? Oil was supposed to be risk free. Maybe nothing is risk free.
What do you think?

Thursday, January 14, 2016

Our economy is in serious trouble

I just discovered an important truth. Supper low oil prices are a disaster for our economy. Let me explain. The energy sector is one of the most important parts of our economy. If the energy sector is healthy (making a good profit), then our economy is doing fine. Oil and natural gas account for about 8% of the U.S. economy. It is over a $1 trillion-dollar industry. Not only is oil and gas one of the largest sectors of the economy, it is one of the largest employers and one of the largest tax and fee paying segments. So when oil and gas are hurting, it has a direct impact on our economy. Yes, high oil prices hurt the economy, but supper low prices are even worse. With oil under $40, the oil and gas sector is going to get hit hard. With it will come a huge hit to our overall economy that very few seem to notice.

I like lower gas pieces (though they have not been all that low in California), but not when it starts costing profits, jobs, and tax revenue. I oil and gas remain this low, buckle your seat belts, this is going to get ugly.

Friday, January 8, 2016

The Economy

On 12-12-14 I wrote: "In 2008 oil fell by $100 a barrel in 6 months (a 75% drop)! If oil follows the same path we could see oil at close to $30 before it stops falling. Now that sounds unlikely, but it has happened before, so why would this be different? What is also interesting is that stock prices eventually followed the price of oil. The S&P 500 fell from 1560 to 666, a fall of about 60%. So we could see stocks fall by as much as 50%. That would put the S&P 500 easily below 1000. So here is what I am predicting. Oil will fall below $40 and the S&P 500 will fall below 1000. Unfortunately I can’t put a date on it, but I would think that within six to nine months to be reasonable. Wow, things are going to get ugly."

That was over a year ago and maybe my prediction is finally coming to pass. Oil is well below $40 and the S&P 500 has had it's worst first week of trading of the the year ever. With the S&P 500 closing at around 1900 today, there is a long way to go. It could get very ugly this year.

What do you think?