Oakes,
What if the turmoil spreads to Saudi Arabia?
Here's Rosenberg's take on the situation:
Global equity markets are selling off quite sharply and oil prices soaring amid
the political turmoil in Libya — at one point overnight, WTI hit a two-year high of
$98.48/bbl and was up 10%. The fact that equities are sliding amid the
geopolitical tensions in the Middle East and North Africa is a classic signpost of
an overbought and overextended market that was ripe for a corrective phase.
And the fact that WTI has risen to near $100 a barrel (and trading at a historical
discount to Brent — so reliance just on light sweet crude may be misleading
because oil costs globally have risen to much more onerous levels) despite the
fact that Libya produces just 2% of the world’s supply and is the number 8
producer within OPEC (it exports 1.5 mbd) is an additional sign of just how tight
global crude supplies are.
The risk that the turmoil in the Arab states spreads further could very easily
touch off further gyrations and upward pressure on energy prices, especially with
Chinese demand showing no sign of abating … yet. After all, pricing in Libya
supply disruptions is one thing but what if this social unrest spreads to Saudi
Arabia, which holds 20% of the world’s oil? If Libya can spark a $10/bbl
response, imagine what a similar uprising in Saudi Arabia could unleash. Do the
math: we’d be talking about $200 oil (as dictatorships/ruling elites come under
assault, one can’t help but think if it is possible that the turmoil could ever
spread to China — see China Cracks Down on Web Amid Unrest on page A8 on
today’s WSJ and have a good look at Beijing and the Arab Revolt on page A13).
If equity risk premia do not manage to rise in this environment then we most
certainly are in a total new era — of complacency.
As it stands, even $100 a barrel is a dead weight drag on cycle-high profit
margins and discretionary consumer spending. Remember when oil first reached
the $100 mark in March 2008 the unemployment rate was 5%, not 9%, and
fiscal policy was about to be loosened in a dramatic fashion, not tightened. The
Fed had 300 basis points of rate cuts in its chamber, not zero. And while the
impact will be felt in the real U.S. economic aggregates as a rising price deflator
cuts into real-side activity, the effects are even harsher in emerging markets,
who’s economies are far more energy-sensitive (and less energy efficient) than
is the case in the developed world.
Bladerunner
