Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Why $20-a-Barrel Oil Should Scare You to Death

Even though it seems to defy common sense, the idea of $20 a barrel oil as predicted by analysts at Morgan Stanley and elsewhere should scare you to death. The reason it should scare you to death is simple: $20 a barrel oil could lead to economic disaster and possibly political collapse around the globe.

If you do not believe me, just take a look at some of the effects of oil at $29 a barrel:

  • Mass layoffs and unemployment around the globe. The Week reported that British Petroleum (NYSE: BP) plans to lay off 4,000 people around the globe and 600 in Great Britain alone. Industry analysts estimate that 250,000 oil industry employees could be laid off worldwide. This figure includes up to 87,000 people in the United States, according to Michael Planet, an economist at the Federal Reserve in Dallas. These numbers are low because they don’t include all the others hurt, such as the waitress no longer getting those big tips from the oil field workers.


  • Bankruptcies and defaults of companies of all shapes and sizes, including possibly a major oil company. As I pointed out elsewhere, some of them are already on shaky ground; on September 30, 2015, BP reported a net income of -$7.58 billion, meaning it lost over seven billion dollars. Royal Dutch Shell (NYSE: RDS.B) saw its income fall by $11.875 billion in just three months, from June to September 2015. On June 30 Shell reported a net income of $13.47 billion; by September it had collapsed to just $1.595 billion. What happens if such losses continue for several quarters, default? America’s oil giants are in a little better shape. Yet Chevron (NYSE: CVX) saw its income cut by over $12 billion in year. In September 2014 Chevron reported a net income of $20.7 billion; by September 2015 it was $8.646 billion. If that keeps up, Chevron could enter the negative income territory by September 2016.


  • Loss of government revenues around the world. Alaska’s revenues have fallen by 81% since 2012, Saudi Arabia is facing a $97.76 budget deficit and $223.76 budget cuts this year and in the United Kingdom, Her Majesty’s government could miss out on £400 billion ($578 billion) in oil revenue, according to the Natural Resource Governance Institute. Naturally, this could lead to increased taxes and cuts in government services, which will not be popular. Saudi Arabia has already cut government subsidies to oil and electricity and instituted a de facto tax increase and a value added tax, and Alaska’s governor has proposed reinstating the income tax.


  • One of the world’s largest oil producing nations, Venezuela, could have an annual inflation rate of 180%, according to Reuters. Russians enjoyed an inflation rate of 12.9% during 2015, and the ruble lost half of its value.



  • Political unrest. Venezuela is already facing political unrest with a constitutional crisis that could lead to civil war. President Nicolas Maduro is trying to keep the opposition from taking control of Parliament and dismantling his failed regime. The cause of the crisis is inflation triggered by the oil price collapse. Currently, Maduro seems to have the upper hand because he has the military on his side, but what happens if he can no longer pay his army?

How Cheap Oil Could Lead to War

These are the results of $30 a barrel oil. What happens with $20 or $15 or $10 a barrel oil? Hyperinflation in every major oil-producing nation is leading to political collapse. What happens if there is hyperinflation in Iran or Saudi Arabia or Nigeria, or worse, what happens if the king of Saudi Arabia can no longer pay his army? Saudi Arabia has a very large modern army with lots of high-tech equipment and large numbers of well-trained soldiers. What happens to it if that state collapses or the king loses his head?

That sounds like a recipe for an Arab Napoleon to me. Remember, Napoleon rose to power after a fiscal crisis caused the French Revolution and the collapse of France’s monarchy.


One result could be a collapse of security around the world. The Guardian pointed out that 75% of Nigeria’s national budget comes from oil revenue. What happens to the war against the Boko Haram terrorists if the Nigerian army leaves the field? Her Majesty’s government is now sending additional troops to Nigeria to help that nation fight the fanatics.

Other effects could be a massive loss of revenue to ISIS. That could make things worse because ISIS is basically a criminal gang that’s in the loot and pillage business; if the oil money runs out, they’ll start attacking other countries in search of additional cash.

So, yes, folks, there is too much of a good thing. Cheap oil is great when you’re at the filling station, but it should be keeping you up at night. Already cheap oil has produced depression-like conditions around the world. That should scare us to death because one of the main results of the Great Depression of the 1930s was World War II.

The instability created by cheap oil could completely reshape the world and cause a lot of suffering in its wake. Instead of welcoming $10 or $15 a barrel oil, perhaps we should fear because it could be a recipe for war.