The Political Economy of Oil - A Slippery Slope

In today's Breakingviews.com, Pierre Briancon  told a sad story about Russia's economy. GDP possibly collapsing 8%, investment tanking, consumption "suffering a sever slowdown" etc. The only thing holding it up, he says, is the Russian government < sounds like the US > . And what's enabling them to do this is their oil sales. More specifically their oil sales at the nice price of $70 a barrel. < Meanwhile  the Russian etf RSX is up 150% from its 52 week low. Think of a Terry Pratchett novel for comparison. >

But Mr.Briancon's story has wider implications than Russia.

There are three big factors internationally supporting the dollar's price vis a vis other currencies. China,  Japan, and the petro countries. China seems to be satiated with dollars, and it has indicated enough already. Having over a trillion in US debt < approximately 1/2 of their GDP > will do that. Japan's newly elected government stated during elections that they would be diversifying foreign currency reserves away from the dollar. Whether only election histrionics remains to be seen.

Then we have the petro countries. As usual Nigeria goes from one self induced crisis to the next, while Venezuela's Chavez plays at being a 21st Century Castro, sans beard and without the charm. The big players however are the Persian Gulf countries.

And many Persian Gulf countries in some respects seem similar to Russia. Though I'm sure they wished they weren't. Specifically their economies are under a lot of strain. First there's the little de facto bankruptcy in Dubai. That's going to likely cost the UAE $125 billion. Then there's perennially strains in Saudi society. Too much spending with too little money < even though they have one of the non developed world's highest per capita GDPs >. Iran has ambitions of  "nuclear power". That has its costs, not only politically.

Then lets remember all those oversea investments such countries like Kuwait have. Even now after the world stock market rallies, they likely still have sever losses.   Perhaps the most financially stable country in the region  might be Bahrain < an island , in more ways than only geographically > .

What this has to do with oil and the price of oil is obvious. It is the high oil price that is maintaining stability in these countries. After all, there's less chance of political problems if people are doing ok economically. < Just look at China's constant obsession about this. > If the price of oil falls from it's speculative level of $70 to it's actual economic demand price of $40-$30 a barrel and sticks at those low prices, all these petro countries, including Russia,  will be in dire trouble.

The petro countries, especially the Persian Gulf area, have large currency reserves of dollars. A bad economic emergency will most likely cause them to start unloading these dollars to save their political systems, meaning the people in power wanting to stay alive < like I've said before, Don't shoot comrades. > As you probably already guessed, this would likely cause a currency collapse / crisis. Which is another way of saying everyone outside America wants out of the dollar.

Metaphorically, it would be like one US football team trying to get out of the same door at the same time. Most likely the wall would disintegrate in the process.

Like I said in the previous article, the world is a complicated place. It's also a very integrated place. But unlike  robust, distributed networks such as the internet, this is a very fragile integration. One hub / node of this international network going out, like a country or even a Lehman Brothers, can have vast exponential effects on the entire system. It is nonlinear and behaves similar to Catastrophe Theory.

Exciting Times.

"My problem lies in reconciling my habits with my net income." - Errol Flynn