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Oil and the Death of Greece

by | published May 14th, 2012

As the Eurozone continues to show weakness, events yesterday in Athens may accelerate the situation. The downward movement in oil prices this morning in both London and on the NYMEX testifies to the rising concern.

The aftermath of the Greek elections propelled the new radical left party SYRIZA into the limelight as the second strongest party in the country. Given the adamant refusal by SYRIZA leadership to accept bailout reforms, the party’s new brokering position means the crisis will continue.

Bitter austerity measures await the formation of a coalition government, since no party received a majority of the seats in parliament from the vote. The coalition is supported by both the New Democracy and socialist PASOK parties, which have taken turns ruling Greece for nearly four decades.

But the surprise showing of SYRIZA has thrown the possibility of an accord into disarray.

At best, this means a further delay and likely a new election.

On the other hand, Greece has little time left. Any further delay in forming a government, with no guarantee that a very angry population will vote any differently the next time around, puts the next tranche of the European Union bailout package in jeopardy.

It is now more likely that Greece will leave (or be pushed out of) the Eurozone, casting a greater uncertainty on both the currency and the southern tier of countries still in the zone.

Spain is the current focus of concern, but Italy is also exhibiting renewed weakness.

Unlike Greece, Spain and Italy have debt problems that dwarf the ability of any Brussels-led support package. These economies are simply too large to be “rescued” from the outside.

The concerns over contagion, therefore, may actually expedite a Greek departure earlier than most thought possible.

Including me.

It is true that any members leaving the Eurozone will have a negative effect upon currency strength and economic prospects. It is also unclear how the Greek departure will aid in shoring up either Spain or Italy. The problems in each of these economies are endemic; they are not primarily a result of “spillovers” from the situation in Greece.

All of which means, to borrow a phrase from former U.S. Secretary of Defense Donald Rumsfeld, there are a series of “known unknowns” now facing the E.U. The credit and banking problems are essentially the “known” part of this equation. The extent of the fallout on the euro as a whole is the massive “unknown” flowing through the calculations.

This is accentuated by recent developments in the two major economies using the euro -Germany and France. No rescue package for any E.U. member is possible without the leadership of these two dominant European economies. To date, Paris has emphasized protecting its suspect banking sector, while Berlin has a strong political undercurrent demanding additional protection of German production and trade.

However, the recent French elections, in which a socialist has been elected president, and indications surfacing that the German economy may be facing a slowdown, will put continued support of a “bailout for austerity” approach to Greece in question.

Thus far, both major nations have led the E.U.-Greek approach, strongly arguing that the preservation of the euro demands it. The dramatic political events unfolding in Athens are rapidly undermining that support.

And this has impacted on the price of oil.

The only way oil prices are coming down is by the advance of pressures outside (exogenous to, as the analysts say) the oil market itself.

This is what happened in 2008. The rise in crude and the corresponding spike in the cost of oil products like gasoline, diesel, and heating oil retreated only when the full weight of the subprime mortgage-induced credit freeze hit.

Overall demand dried up as the ensuing recession hit.

We are seeing a similar short-term pullback in prices as concerns over falling demand levels parallel the European confusion.

Yet this time there are three important differences.

First, the American economy is largely insulating itself from what happens on the continent (assuming the JPMorgans of the world can oversee their traders).

Second, oil demand continues in those parts of the world that actually determine the pricing level. As I have said a number of times before, these are not North America, Western Europe or the developed (OECD) countries. This is based on developing and accelerating new economies elsewhere.

There is also a third factor of some importance.

The 2008 collapse and resulting worldwide recession centered on dollar-denominated assets, the assets basic to the global network of trade, cross-border capital flows, and wealth.

Not so this time around.

The current situation tends to benefit the value of the dollar against the euro. With virtually all international oil trades in dollars, that does mean prices may stabilize for a time. But it also means the concentrated asset wealth in those oil transactions will increase.

And despite the events in Europe, the ultimate value of oil contracts will increase as well – especially in a market where the essential rise in demand is occurring in those regions of the world not directly impacted by the euro zone problems.

So, farewell Greece, good luck, Spain.

Once the dust settles, oil holdings will continue to exhibit significant value gains moving forward.

Sincerely,

Kent

P.S. By the way, on Friday, I raised my target price for oil – significantly.

But if you missed it, a major event is now just six weeks away that will have profound effects on the market. And oil at this target level is set to have significant effects worldwide – many of which the world is not prepared for. Yet the most significant effect of all – for you, anyway – will be the extraordinary amount of money this situation is likely to create.

Here are my new projections.

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  1. Jeremy Gustafson
    May 14th, 2012 at 14:39 | #1

    Dr. Moors,

    I always look forward to your comments regarding the energy industry. What I seem to be missing is that if the Euro falls, the dollar rises, won’t all commodities including oil fall like we have seen since Operation twist? It seems all commodities fall when the dollar rises and vice-versa so why would commodities reverse this trend if the dollar becomes stronger from a weaker euro and continues to rise. Thank You

  2. DD
    May 14th, 2012 at 16:04 | #2

    Just like to add a few of my own comments:
    In regards to number one – If the US is going to call on its loan to the EU, I wonder what would happen if China calls on its money that it has loaned the US? Seems like to two way street to me! What turns around comes around type scenario.

    In regards to number two – If the EU and US goes to the ropes, I do agree the rest of the world will go to the ropes too, but not half as bad or as much as the EU and US might think. I think many countries around the world will come out ok in the long run. Imo, it is nothing but US fear mongering when I hear/read that the world cannot survive w/o the US (or even the EU). – What total and utter baloney!

    In regards to section three – I do agree with you that for the US to bail anyone out, then there would be something in it for the US, for I have always found it very hard that the US would do such a thing out of the goodness of its heart. – This also applies to monetary / food donations of sorts to poorer countries (apart from Israel of course!) or whatever the case maybe; for the US would only be after that country’s natural resources. I think many people / countries realize the US has ulterior motives in just about everything it does nowadays.

    Btw, Israel receives $8.2 million EVERYDAY from the US tax payer (+ money from Germany and the UK)and has done so since the early-mid 70s, yet few people know this or even blink at this fact! Maybe the two-faced of this kind of giving should first stop with giving this kind of money (and military) to Israel to show good stead. (Two-faced is perhaps too harsh a word, but I think you get my point).

  3. Robert Berke
    May 14th, 2012 at 18:48 | #3

    Sorry, Kent, but I don’t see any way that the US is insulated from the economic recession in Europe. It’s certain that both Japan (currently entering recession) and China’s slowing growth is strongly connected to Europe’s downturn, and so too the US. In fact, the falling US stock market is a direct result of the growing European crisis.
    And there’s no way that the price of oil will be unaffected by the global macro. I’m not certain whether the growing glut of nat gas will stomp on crude oil, but I do think the low price of nat gas will eventually be transfered to the rest of the world, via the LNG trade.

    One final note: I also doubt that the US will attack Iran this year. Obama’s fate is tied to the economy, and an attack on Iran could raise the price of crude to levels not yet seen, and that would be a disaster for the US economy that is in a weak recover. The President is not about to commit political suicide, and Israel, a US client state, will not act on its own.

  4. May 14th, 2012 at 22:13 | #4

    According to the U.S. Energy Information Administration, the U.S. is the number 1 consumer of oil and China became #2 in 2009. They further state that China’s oil consumption growth accounted for over 1/3 of the world’s oil consumption growth in 2010. It is my understanding that China’s slowing economic growth has been self engineered because their economy was heating up too fast. Now they are taking off the brakes and letting it re-accelerate.

  5. Robert Berke
    May 15th, 2012 at 00:04 | #5

    You don’t think the slowing of the Chinese economy has anything to do with the economic downturn of its largest customer, Europe? Or the weak US economy. If China’s slowing economy is all self engineered, how do you explain all of Asia falling, including Australia, India, Japan, Korea, etc.?

  6. May 15th, 2012 at 03:23 | #6

    Floods don’t kill people, (breaking) dams do!

    Greece wasn’t and isn’t a problem. What is, are the ‘fixes’. The astronomic cost of these has aggravated the difficulties of eurozone countries, and of a UK that insists on jumping into the maelström.

    Everything governments can do has been done and has failed. Our last, least-bad recourse is to bite the bullet, dump Greece – and its poor, guiltless people – and let the worms that will then crawl out of greedy, guilty banks everywhere devour their hosts.

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