PARIS (ResourceInvestor.com) -- There are a series of issues that are confusing the oil market at the moment, and just to add to the confusion come the problems with U.S. debt. The main difficulty with U.S. debt is the same as predicting the path of the storm 94L, which is threatening to become a tropical depression, then tropical storm, then hurricane. Just how far will U.S. debt develop? Will it be blown away amidst the markets or will it be a financial cyclone that zaps consumption?
U.S. debt can affect the oil market in a number of ways. First the obvious. It could cause a recession if it is large enough, either in the U.S. or in the connected markets like China. This could cause a downturn in economic activity and therefore a drop in the price of oil as demand falters.
There are signs, as we have said before in this column, that a recession is coming. But once again in the spirit of 94L, how bad will it be? Interest rates are up, debt defaulting is up and some commodity prices remain high. Not just in energy but also in wheat and meat. But this does not mean that oil prices are going to be hit. As we shall explain later.
Secondly as easy credit dries up certain sectors that have benefited from the rush of cheap money will be hurt. That could be real estate, it could be retail, it could be travel or it could be energy. What is likely that small companies with no cash will find themselves swallowed up by bigger boys still able to get access to some funding. Small companies - and we are not talking about U.S. independents like Apache or Murphy, they are too big - are too vulnerable in times of economic difficulty.
So we are likely to see the “minnows” gobbled up as they can no longer find cash to lever their assets. But even if this happens it is unlikely to worry the price of a barrel of oil.
OPEC, which meets in a few days time, is unlikely to be keen about expanding production in times of low consumption. What the U.S. debt crunch will do is say to the nations in OPEC that making huge investments - at a time of very high costs - is a waste of money. In some ways it always is, consumer nations ask producer nations to spend more of their money so they can make less. It is not really economics, more coercion.
But if there is a prospect that U.S. consumption is going to flatten - and this week U.S. gasoline fell to $2.75 nationally - then OPEC is not exactly going to be jumping up and down to spend those extra billions on oil that no one is going to pay decent money for. And make no mistake, OPEC is very pleased with $70 oil.
What the U.S. debt problem is doing is casting a great big blanket over the whole energy complex. Even the banks who are involved in the mess - that they created by being idiots - do not know how it is going to play out, so how should the oil minister of a country in the Middle East? The answer is they do not.
So we are going to be left with an extra problem that may linger for some months, if not a year or two, but that will affect the investment in production even longer than that. This is like handing a child a cake and telling him not to eat it: temptation will win out. The producer nations have less incentive to invest, less crude will come on the market and as fields continue to decline, the price of oil will be held higher than it otherwise would have been.
The contagion from debt may not be about consumption, but about confusion.
