Oi Oi Oil

di Finanza Operativa 16 Agosto 2018 | 14:00

A cura di Walter Snyder, Swiss Financial Consulting

Despite all the hyperbole concerning alternative sources of energy, oil still remains the most important commodity in the global economy. It is therefore of extreme importance that the flow of oil continue without interruption so that business goes on as usual. The unilateral US imposition of tariffs and restrictions on Iranian oil is going to have an impact on the supply of oil and how it is paid for.

There are two factors among many others that influence the supply and trade of oil, namely, the American fracking industry and the Shanghai oil futures exchange. In the first case there are problems that restrict the production of oil, namely, pipeline bottlenecks and the depletion rate of wells. In order to maintain a high level of production, new wells must constantly be drilled while the best sweet spots have already been exploited. Then there has been negative cash flow for years for most companies engaged in fracking, and there are large debts that have been accumulated. For American fracking to have any viable future, producers need an oil price over $100 a barrel or more. For this reason it would be prudent for investors to avoid high yield bonds from American oil companies or to sell those already in their portfolios.

The second factor is important since US dollars are not necessary to trade on the Shanghai exchange. China can acquire Iranian oil with yuan and thus ignore the American sanctions. Other countries could also buy oil with yuan and avoid having to use dollars. Thus one indirect consequence of the imposition of restrictions on the acquisition of Iranian oil on the part of the US will be less demand for dollars to buy oil and further diminution of the importance of the dollar for global commerce and as a reserve currency. In fact the President of the Russian Federation, Mr Putin, has made it clear that the use of sanctions would be counterproductive for the US currency. “Follow the money” may in this case result in negative consequences for American financial dominance.

Another consequence of the attack on Iranian oil is a probable increase in the price of oil. Depending on how much extra supply Russia and Saudi Arabia can put on the market in a timely manner, the price may easily go up to $80 a barrel, which would consequently fuel inflation. Given the high level of indebtedness of the US government and of many companies, a slowdown in growth will most probably result because of the higher cost of financing debt.

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