The Financialized-Oil Dominoes Are Toppling
(December 12, 2014)
The drop in oil revenues has triggered a self-reinforcing feedback dynamic.
Oil is not just something that is refined into fuel--it is capital, collateral, debt and risk. In other words, it is intrinsically financial. As I noted in The Oil-Drenched Black Swan, Part 2: The Financialization of Oil, oil has been financialized to the point that few outside the industry understand the dominoes that are currently toppling.
Let's start with the obvious fact that the impact of lower oil is financial, political and geopolitical. Lower oil revenues are negatively impacting:
1. Oil-exportersí revenues
2. Monetary policy of central banks
3. Trade flows
4. Global financial markets
Lower revenues are pressuring oil-dependent governments such as Russia, Venezuela and Iran, and destabilizing the geopolitical order as weakened oil exporters sink into recession and political turmoil.
Lower revenues are also kicking the financial supports out from under the debt-dependent, enormously capital-intensive oil exploration and development projects in North America.
Simply put, the sharp drop in oil revenues has knocked over a line of financial dominoes whose end is not yet in sight. These issues have been addressed by a number of analysts; here is a small selection of recent stories:
Why US Shale May Fizzle Rather Than Boom (research by Mason Inman)
The drop in oil revenues has triggered a self-reinforcing feedback dynamic. As the financial dominoes fall, there is less capital available to maintain production, so oil output falls, further reducing income. As the collateral,income and impaired debt dominoes topple, risky debt in sectors completely unrelated to oil start falling as institutions trim risk throughout their holdings.
Gordon T. Long and I discuss the highlights of this complex set of issues in this video program, The Oil-Drenched Black Swan (28 minutes):
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