With every passing day it is becoming more apparent that the crisis of the depletion of cheap oil has become deeply enmeshed in the European debt crises.
The sequence of events is well known. Greece's economy is imploding; the government can no longer pay its bills without continuing bailouts from the EU; at some point Greece will have to default on at least part of the $430 billion it owes to mostly European banks. Such a default would in turn do severe damage to the viability of many major European Banks which are already suffering a liquidity shortage from the slowing global economy. It is widely believed that these problems quickly would spread to Italy, Spain, Portugal, Ireland, and now Belgium which are too large to ever be bailed out by France and Germany. Credit Default Swaps would kick in and, taken to the extreme, the world could conceivably not have much of a banking system left.
What is most disconcerting is that many believe that unless all this is settled in the next few weeks, the deluge will begin. Obviously the Europeans do not want to see their financial system collapse and are scrambling to find a solution. EU leaders have given themselves a deadline of October 23rd to come up with a plan to settle the Greek debt question and then recapitalize the European banks that will have to take heavy losses on Greek and possibly other nations' sovereign debts. One of the many issues involved in this crisis, of course, is how much of these heavy losses will be absorbed by the banks making the loans, and how much will be absorbed by the taxpayers of the better-off Eurozone states. London and Washington are putting heavy pressure on the EU to settle this issue, realizing the havoc that would ensue should there be even a partial meltdown of the EU banking system.
There is a big systemic problem going on here. So long as 17 sovereign states and their parliaments have to approve major actions the likelihood that there will be quick and decisive solution to all this seems remote. As we have seen with the Greek situation over the last two years, there is very little the Eurozone as a collective can do to enforce new and highly unpopular economic and social policies on the members, short of kicking them out of the Eurozone and suffering the consequences of a hard default. Despite all the optimism in the financial press and rising equity prices, it seem that in reality there is very little the EU can do to effect a long-term solution.
At this stage, writing off Greece is a rather minor problem, as it only contributes 3 percent to the EUs GDP, as compared to major disruptions to the EU's and by extension the world's banking system. For now it seems that the best the EU's leaders will be able to do is the kick the can down the road a ways and hope for the best.
Our concern here remains how all this will affect oil prices and the availability of oil. Concern over the course of the Greek debt crisis has been roiling the foreign exchange and equity markets of late taking oil prices along for a rather wild ride. Last week we had London oil below $100 a barrel, but renewed optimism, or as it is now known, "risk appetite," soon sent London oil back up over $111 where it continues to methodically eat the heart out of the OECD economies. London oil has now been above $100 a barrel for the last nine months and so far shows no signs of collapsing to the fabled $60 a barrel level as it did three years ago.
The world has changed significantly since 2008. The Arab Awakening and the need for more oil revenue have put many OPEC producers, especially the Saudis, in a position where slipping oil revenues could threaten their hold on power. Last week when oil slipped briefly below $100, the rhetoric coming out of OPEC about production cuts to maintain "proper" oil prices increased significantly. Over the weekend we learned that the Saudis who had unilaterally increased their oil production by over 1 million barrels a day (b/d) in order to make up for lost Libyan production had cut their production by 400,000 b/d in September as they saw prices slipping. The message here is that the European economy and economies of the rest of the OECD are likely to contract under the weight of unaffordable energy for the foreseeable future. This will only add to the problems of those planning for bailouts and recapitalizations in Europe as they are chasing moving targets.
The other side of the coin in which the EU authorities are unable to contain the Greek debt crisis which then spreads across first the European and then the global financial system would likely lead to consequences too serious to meaningfully predict. The demand for oil would likely drop but by how much and where is impossible to say. Unless the EU's crisis spreads into a mega catastrophe with the OECD economies slumping into a deep depression and all those trillions of dollars in Credit Default Swaps are "made whole," parts of the world - Asia, Russia, Brazil, and OPEC exporters - seem likely to weather the storm and continue to demand increasing amounts of oil although perhaps at a slower rate.
We are about to live through some very "interesting times" after which the global economic, political, and social landscapes are likely to be quite different.
Originally published October 12, 2011 at Falls Church News-Press