The Recession, Low Oil & Renewal
Recent news that OPEC has frozen its oil output is significant, for it means that its original strategy of flooding the world with oil to maintain market share in the hope of bankrupting both Russia and U.S. frackers has failed.
OPEC petro-monarchies are pegged to an appreciating dollar with severely restricted abilities regarding structural diversification. This insight isn’t new, but the fiscal, social conditions that OPEC is operating in make it very difficult for it to gain any traction against Iran, Russia, U.S. frackers, or indigenous political discontent that has enveloped the Saudi periphery. It is this geopolitical insight that has pushed the Saudi’s to corral OPEC into freezing production.
The Saudi’s blinked.
In my view, they should have seen this coming. The Saudi’s wrongly believed they could send the price of oil over a cliff and wait for better conditions. But then the Iranians started to move westward encircling the Saudis while Russia landed on the northeastern border of the Mediterranean pushing east. The noose has captured the House of Saud by surprise. It shouldn’t have.
The truth of the matter is that western oil dependencies like the U.S. have discovered new sources of political renewal that have strengthened its position relative to OPEC. The petro-monarchies are politically weak, static, un-diversified, lacking an industrial base from which to finance competing sources of engagement. Their capital base is thin and exposed.
The U.S. isn’t growing. We’ve got slowing output, slumping indices, declining corporate earnings, and zero capital investment with rising inventories. Yet the American’s see light at the end the tunnel. With an election favoring a GOP rival and surging fracking upon private property; the U.S. Republic senses renewed direction. This dynamic of surging political autonomy lead by technologically driven horizontal drilling and hydraulic fracturing upon private property has destroyed OPCE’s monolithic institutions that govern price signals. Exhausted, the Arabs have sought accommodation with Russia in the hope of leveraging a pause.
The old Keynesian bias of building massive debt laden industries with business models fit to exploit scarcity has sutured the Arab’s to failure. Disruptive innovation is now hinged upon a scale that inverts previous concepts of ‘mass.’ Abundance from inversion isn’t something the Arab civilization can compete with. They’ve folded. We can only hold this lead with tax reform. As of this writing, non-investment-grade bond markets are vulnerable. Energy defaults throughout America are expected, and junk bond spreads have widened. Wait, it gets worse. Energy company earnings have collapsed with the S&P 500 energy sector falling too. But so have kleptocracies like Russia, Venezuela, Nigeria, and others.
The Chinese economy has decided to break its link with the greenback because the foreign exchange value of an appreciating dollar damages Beijing prospect for maneuverability. Remember, a nation devalues only to save public finances. A float should be expected soon, but the damage to world supply chains is permanent.
Here’s the good news: all favorable trends are merging toward the U.S.
We begin in November!
Originally posted on William Holland’s wordpress.