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OpEdNews Op Eds    H2'ed 1/7/15

Is Putin Creating a New World Order? ... Oil Price Blowback

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"Simply put, lower oil and gasoline prices may have a bigger detraction on the economy than the 'savings' provided to consumers." (The Gasoline Price Myth, Lance Roberts, oilprice.com)

None of this sounds very reassuring, does it? And yet, all we hear from the media is how the economy is going to reach "escape velocity" on the back of cheap oil. Nonsense. This is just more "green shoots" baloney wrapped in public relations hype. The fact is, the economy needs the good-paying jobs more than it needs low-priced energy. But now that prices are tumbling, those jobs are going to disappear which is going to be a drag on growth. Now check out these headlines I picked up on Google News that help to show what's going on off the radar:

"Texas is in danger of a recession," CNN Money.
"Texas Could Be Headed for an Oil-Fueled Recession, JP Morgan Economist Says," Wall Street Journal.
"Good Times From Texas to North Dakota May Turn Bad on Oil-Price Drop," Bloomberg.
"Low Oil Prices in the New Year Are Screwing Petrostates," Vice News.
"Top US Oil States Are Taking A Hit From Plunging Crude Prices," Business Insider

Get the picture? If oil prices continue to fall, unemployment is going to spike, activity is going to slow, and the economy is going tank. And the damage won't be limited to the US either. Get a load of this from the UK Telegraph:

"A third of Britain's listed oil and gas companies are in danger of running out of working capital and even going bankrupt amid a slump in the value of crude, according to new research.

"Financial risk management group Company Watch believes that 70pc of the UK's publicly listed oil exploration and production companies are now unprofitable, racking up significant losses in the region of 1.8bn.

"Such is the extent of the financial pressure now bearing down on highly leveraged drillers in the UK that Company Watch estimates that a third of the 126 quoted oil and gas companies on AIM and the London Stock Exchange are generating no revenues.

"The findings are the latest warning to hit the oil and gas industry since a slump in the price of crude accelerated in November when the Organisation of Petroleum Exporting Countries (Opec) decided to keep its output levels unchanged. The decision has caused carnage in oil markets with a barrel of Brent crude falling 45pc since June to around $60 per barrel." (Third of listed UK oil and gas drillers face bankruptcy, Telegraph)

"Carnage in oil markets," you say?

Indeed. Many of the oil-drilling newcomers set up shop to take advantage of the low rates and easy money available in the bond market. Now that prices have crashed, investors are avoiding energy-related junk bonds like the plague, which is making it impossible for the smaller companies to roll over their debt or attract fresh capital. When these companies start to default en masse, as they certainly will if prices don't rebound, the blowback will be felt on bank balance sheets across the country creating the possibility of another financial meltdown. (Now we ARE talking about a financial crisis.)

The basic problem is that the banks have bundled a lot of their dodgy debt into financially-engineered products like Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs) that will inevitably fail when borrowers are no longer able to service the loans. The rot can be concealed for a while, but eventually, if prices don't recover, a significant number of these companies are going to go under which will push the perennially under-capitalized banking system to the brink once again.

That's why Washington's plan to push down oil prices (to hurt the Russian economy) might have made sense on a short-term basis (to shock Putin into submission) but as a long-term strategy, it's nuts. And what's even crazier, is that Obama has decided to double-down on the same wacky plan even though Putin hasn't given an inch. Check this out from Reuters on Monday:

"The Obama administration has opened a new front in the global battle for oil market share, effectively clearing the way for the shipment of as much as a million barrels per day of ultra-light U.S. crude to the rest of the world...

"The Department of Commerce on Tuesday ended a year-long silence on a contentious, four-decade ban on oil exports, saying it had begun approving a backlog of requests to sell processed light oil abroad.

"The action comes at a critical juncture for the global oil market. World prices have halved to less than $60 a barrel since the summer as top exporter Saudi Arabia, once a staunch defender of $100 oil, refused to cut production in the face of surging U.S. shale output and tempered global demand...

"With global oil markets in flux, it is far from clear how much U.S. condensate will find a market overseas."
(Analysis -- U.S. opening of oil export tap widens battle for global market, Reuters)

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Mike is a freelance writer living in Washington state.

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