Sunday, November 23, 2008


More on the Consequences of Cheap Oil

In previous posts I have noted the downside of cheap crude primarily in terms of how it hampers the development of new oil fields. Another downside, described in this article, is that it spells big trouble for public spending by oil-producing countries, which depend heavily — or in the case of some countries, almost exclusively — on oil revenues to run their economies. It doesn’t take a genius to see that the consequences could be very serious, or even catastrophic, not only for those countries themselves, but also for the whole world because restive populations mixed with economic woes are an explosive mix at home, and the resulting strife could likely disrupt their oil exports. And needless to say, that would just drag down the entire world economy all the faster.

So again, cheap oil is nothing to be especially happy about, for it offers only momentary relief from the inevitable supply crunch.

On the other hand, should energy demand rise again, oil producers will enjoy increased revenues and a respite, but at the same time, the prices of crude and other commodities are bound to spike again as they did earlier this year. That would of course precipitate a repeat of the current crash. In short, we’re damned if we do, and damned if we don’t.

Whatever you may think of Team Obama, or any other government for that matter, they are now going to have their hands full just trying to keep parts of the machine from flying off all over the place. For the rest of us, it will be paramount to keep working on preparations to weather the storm while dodging those flying parts.

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