Is there a new oil shock on its way?

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Is there a new oil shock on its way?

Postby Hawknc » Sat Mar 05, 2011 2:37 pm UTC

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THE price of oil has had an unnerving ability to blow up the world economy, and the Middle East has often provided the spark. The Arab oil embargo of 1973, the Iranian revolution in 1978-79 and Saddam Hussein’s invasion of Kuwait in 1990 are all painful reminders of how the region’s combustible mix of geopolitics and geology can wreak havoc. With protests cascading across Arabia, is the world in for another oil shock?

There are good reasons to worry. The Middle East and north Africa produce more than one-third of the world’s oil. Libya’s turmoil shows that a revolution can quickly disrupt oil supply. Even while Muammar Qaddafi hangs on with delusional determination and Western countries debate whether to enforce a no-fly zone (see article), Libya’s oil output has halved, as foreign workers flee and the country fragments. The spread of unrest across the region threatens wider disruption.

The markets’ reaction has been surprisingly modest. The price of Brent crude jumped 15% as Libya’s violence flared up, reaching $120 a barrel on February 24th. But the promise of more production from Saudi Arabia pushed the price down again. It was $116 on March 2nd—20% higher than the beginning of the year, but well below the peaks of 2008. Most economists are sanguine: global growth might slow by a few tenths of a percentage point, they reckon, but not enough to jeopardise the rich world’s recovery.

That glosses over two big risks. First, a serious supply disruption, or even the fear of it, could send the oil price soaring (see article). Second, dearer oil could fuel inflation—and that might prompt a monetary clampdown that throttles the recovery. A lot will depend on the skill of central bankers.

Of stocks, Saudis and stability

So far, the shocks to supply have been tiny. Libya’s turmoil has reduced global oil output by a mere 1%. In 1973 the figure was around 7.5%. Today’s oil market also has plenty of buffers. Governments have stockpiles, which they didn’t in 1973. Commercial oil stocks are more ample than they were when prices peaked in 2008. Saudi Arabia, the central bank of the oil market, technically has enough spare capacity to replace Libya, Algeria and a clutch of other small producers. And the Saudis have made clear that they are willing to pump.

Yet more disruption cannot be ruled out. The oil industry is extremely complex: getting the right sort of oil to the right place at the right time is crucial. And then there is Saudi Arabia itself (see article). The kingdom has many of the characteristics that have fuelled unrest elsewhere, including an army of disillusioned youths. Despite spending $36 billion so far buying off dissent, a repressive regime faces demands for reform. A whiff of instability would spread panic in the oil market.

Even without a disruption to supply, prices are under pressure from a second source: the gradual dwindling of spare capacity. With the world economy growing strongly, oil demand is far outpacing increases in readily available supply. So any jitters from the Middle East will accelerate and exaggerate a price rise that was already on the way.

What effect would that have? It is some comfort that the world economy is less vulnerable to damage from higher oil prices than it was in the 1970s. Global output is less oil-intensive. Inflation is lower and wages are much less likely to follow energy-induced price rises, so central banks need not respond as forcefully. But less vulnerable does not mean immune.

Dearer oil still implies a transfer from oil consumers to oil producers, and since the latter tend to save more it spells a drop in global demand. A rule of thumb is that a 10% increase in the price of oil will cut a quarter of a percentage point off global growth. With the world economy currently growing at 4.5%, that suggests the oil price would need to leap, probably above its 2008 peak of almost $150 a barrel, to fell the recovery. But even a smaller increase would sap growth and raise inflation.

Shocked into action

In the United States the Federal Reserve will face a relatively easy choice. America’s economy is needlessly vulnerable, thanks to its addiction to oil (and light taxation of it). Yet inflation is extremely low and the economy has plenty of slack. This gives its central bank the latitude to ignore a sudden jump in the oil price. In Europe, where fuel is taxed more heavily, the immediate effect of dearer oil is smaller. But Europe’s central bankers are already more worried about rising prices: hence the fear that they could take pre-emptive action too far, and push Europe’s still-fragile economies back into recession.

By contrast, the biggest risk in the emerging world is inaction. Dearer oil will stoke inflation, especially through higher food prices—and food still accounts for a large part of people’s spending in countries like China, Brazil and India. True, central banks have been raising interest rates, but they have tended to be tardy. Monetary conditions are still too loose, and inflation expectations have risen.

Unfortunately, too many governments in emerging markets have tried to quell inflation and reduce popular anger by subsidising the prices of both food and fuel. Not only does this dull consumers’ sensitivity to rising prices, it could be expensive for the governments concerned. It will stretch India’s optimistic new budget (see article). But the biggest danger lies in the Middle East itself, where subsidies of food and fuel are omnipresent and where politicians are increasing them to quell unrest. Fuel importers, such as Egypt, face a vicious, bankrupting, spiral of higher oil prices and ever bigger subsidies. The answer is to ditch such subsidies and aim help at the poorest, but no Arab ruler is likely to propose such reforms right now.

At its worst, the danger is circular, with dearer oil and political uncertainty feeding each other. Even if that is avoided, the short-term prospects for the world economy are shakier than many realise. But there could be a silver lining: the rest of the world could at long last deal with its vulnerability to oil and the Middle East. The to-do list is well-known, from investing in the infrastructure for electric vehicles to pricing carbon. The 1970s oil shocks transformed the world economy. Perhaps a 2011 oil shock will do the same—at less cost.


Bunch of other related articles worth reading linked in that article. Thoughts? The developed world is better positioned to take an oil shock, at least in terms of transportation, than it has been in the past - alternatives like electric propulsion or CNG can be scaled up if demand is there. The developing world though, particularly BRIC nations that are rapidly adopting petrol-powered vehicles as their primary means of transportation, might be more vulnerable.

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Re: Is there a new oil shock on its way?

Postby Diadem » Sat Mar 05, 2011 3:25 pm UTC

I think it would be a good thing, in the long term. The more unreliable oil becomes, the faster we will transition out of it.
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Re: Is there a new oil shock on its way?

Postby cybermutiny » Sat Mar 05, 2011 4:00 pm UTC

Instability in oil-producing nations, the oncoming summer season in the US, and the inflating American dollar could be the impetus for higher oil prices.
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Re: Is there a new oil shock on its way?

Postby Silastic » Sat Mar 05, 2011 4:07 pm UTC

cybermutiny wrote:Instability in oil-producing nations, the oncoming summer season in the US, and the inflating American dollar could be the impetus for higher oil prices.

Wow, you said that perfectly.
Diadem wrote:I think it would be a good thing, in the long term. The more unreliable oil becomes, the faster we will transition out of it.

I don't know that any amount of instability will quicken our transition out of oil, there are a lot of corporate interests that want to keep us dependant, and unfortunately they have a lot of sway.
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Re: Is there a new oil shock on its way?

Postby Diadem » Sat Mar 05, 2011 4:13 pm UTC

You know this whole thing is so ..

The regimes in Tunisia and Egypt have fallen. Libya is in an all-out civil war. Bahrain and Oman are in Turmoil. Saudi-Arabia and Iran are desperately trying to ward unrest. The entire Middle-East is in a state of flux, and there's no telling if this whole thing will fizzle out relatively peacefully, or if it will turn into something to dwarf the French revolution. And we're worried about rising oil prices?

Can we in the West for once get our priorities straight. You know, just this once.
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Re: Is there a new oil shock on its way?

Postby Hawknc » Sat Mar 05, 2011 4:27 pm UTC

Oil prices don't just affect the West (and we have at least three threads covering the civil unrest in various mideast nations). A steep rise in oil prices means suddenly people can't afford to get to work, or they can't afford food because of the rise in trucking and shipping costs. What priority do you think is being given to this that isn't deserved?

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Re: Is there a new oil shock on its way?

Postby Sharlos » Sat Mar 05, 2011 4:34 pm UTC

Diadem wrote:You know this whole thing is so ..

The regimes in Tunisia and Egypt have fallen. Libya is in an all-out civil war. Bahrain and Oman are in Turmoil. Saudi-Arabia and Iran are desperately trying to ward unrest. The entire Middle-East is in a state of flux, and there's no telling if this whole thing will fizzle out relatively peacefully, or if it will turn into something to dwarf the French revolution. And we're worried about rising oil prices?

Can we in the West for once get our priorities straight. You know, just this once.

You talk as though I can only care about one thing at a time and have to 'prioritise' the things I care about.

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Re: Is there a new oil shock on its way?

Postby Silastic » Sat Mar 05, 2011 5:51 pm UTC

Diadem wrote:You know this whole thing is so ..

The regimes in Tunisia and Egypt have fallen. Libya is in an all-out civil war. Bahrain and Oman are in Turmoil. Saudi-Arabia and Iran are desperately trying to ward unrest. The entire Middle-East is in a state of flux, and there's no telling if this whole thing will fizzle out relatively peacefully, or if it will turn into something to dwarf the French revolution. And we're worried about rising oil prices?

Can we in the West for once get our priorities straight. You know, just this once.

It is possible to care and take an interest in more then one thing at a time. Oil prices/stability effects the entire world. As Hawknc wrote, it effects everyone's ability to work and feed their families. At a time when the world economy is (for the most part) floundering, the price of oil is a big "priority" to many people.
Last edited by Silastic on Sat Mar 05, 2011 11:45 pm UTC, edited 1 time in total.

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Re: Is there a new oil shock on its way?

Postby Hooch » Sat Mar 05, 2011 6:05 pm UTC

A friend of mine has recently looked into the idea of New World Order and has even put together plans in case everything goes to Hell. I regarded him as paranoid at the time, but now I don't blame his paranoia. There's some fucked up shit going on that my mental callouses can no longer ignore.
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Re: Is there a new oil shock on its way?

Postby Jahoclave » Sat Mar 05, 2011 6:59 pm UTC

Diadem wrote:You know this whole thing is so ..

The regimes in Tunisia and Egypt have fallen. Libya is in an all-out civil war. Bahrain and Oman are in Turmoil. Saudi-Arabia and Iran are desperately trying to ward unrest. The entire Middle-East is in a state of flux, and there's no telling if this whole thing will fizzle out relatively peacefully, or if it will turn into something to dwarf the French revolution. And we're worried about rising oil prices?

Can we in the West for once get our priorities straight. You know, just this once.

No. That's just not how we roll. Of course, things that wouldn't be a problem if we'd stopped bitching about global warming being reality or not and actually spent the last decades developing technology that isn't fossil fuel dependent.

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Re: Is there a new oil shock on its way?

Postby Diadem » Sun Mar 06, 2011 6:04 am UTC

Jahoclave wrote:No. That's just not how we roll. Of course, things that wouldn't be a problem if we'd stopped bitching about global warming being reality or not and actually spent the last decades developing technology that isn't fossil fuel dependent.

But, but, but... What if we save the world for nothing?
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Re: Is there a new oil shock on its way?

Postby Jahoclave » Sun Mar 06, 2011 6:21 am UTC

Diadem wrote:
Jahoclave wrote:No. That's just not how we roll. Of course, things that wouldn't be a problem if we'd stopped bitching about global warming being reality or not and actually spent the last decades developing technology that isn't fossil fuel dependent.

But, but, but... What if we save the world for nothing?

We get +1 against aliens. Sheesh. I don't see why people have such a problem with grinding for the sake of having better skills.

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Re: Is there a new oil shock on its way?

Postby bigglesworth » Sun Mar 06, 2011 11:18 am UTC

Silastic wrote:I don't know that any amount of instability will quicken our transition out of oil, there are a lot of corporate interests that want to keep us dependant, and unfortunately they have a lot of sway.
Yeah, but their sway is already being used, and it's being used to try and keep oil prices relatively stable, see Saudi Arabia's rush to increase exploitation of their fields, and drilling everywhere else there might be oil. The sway is being used to try and keep the oil flowing.
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Re: Is there a new oil shock on its way?

Postby Wnderer » Sun Mar 06, 2011 3:51 pm UTC

http://money.cnn.com/2011/03/01/markets ... /index.htm
"The run-up in oil prices is all due to concerns about 'what-if' situations," Ober said. "None of the fundamentals have really changed."


The coming oil crisis is a lot of malarkey. It may create some short term bounces in the market. Food and fuel prices may go up, but real inflation doesn't happen until wages start rising. The housing market still stinks, but the housing market isn't coming back. It was a bubble that is gone so get used to it. The job market is starting to pick up, but there is too much economic friction to overcome to reduce unemployment very quickly. So it's most likely a continued slow ending of the jobless recovery. I'd bet on boom rather than bust given pent up demand for both consumer needs and business ambitions.

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Re: Is there a new oil shock on its way?

Postby dedwrekka » Tue Mar 08, 2011 8:44 am UTC

I think third world or underdeveloped (whatever the political correct term is now) countries could profit from alternative but not necessarily green alternative fuels such as wood-gas, propane, or electric.

Diadem wrote:I think it would be a good thing, in the long term. The more unreliable oil becomes, the faster we will transition out of it.

Didn't happen before under stagflation, probably wont happen now.

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Re: Is there a new oil shock on its way?

Postby Sharlos » Tue Mar 08, 2011 12:23 pm UTC

dedwrekka wrote:I think third world or underdeveloped (whatever the political correct term is now)


It's not about poltical correctness, but plain old correctness.

The terms first-, second-, and third-world refer to a situation during the cold war that no longer exists. That's why it is more accurate to use developed/developing/whatever.

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Re: Is there a new oil shock on its way?

Postby Hawknc » Tue Mar 08, 2011 12:33 pm UTC

Wnderer wrote:http://money.cnn.com/2011/03/01/markets/thebuzz/index.htm
"The run-up in oil prices is all due to concerns about 'what-if' situations," Ober said. "None of the fundamentals have really changed."


The coming oil crisis is a lot of malarkey.

It's speculative, but not necessarily malarkey. A lot of the concern surrounds Saudi Arabia and the potential for protests and civil unrest to spread there, which could actually impact global oil supply. I agree with the writer that fear and uncertainty are driving the price increases right now, which is why the OP is a question rather than a statement. If the middle east stabilises, oil will fall; if not, it'll rise. But it's worth considering the potential consequences of the bad-case scenario.
dedwrekka wrote:I think third world or underdeveloped (whatever the political correct term is now)

We use the term "emerging countries/markets". It's...spinny, but better than a lot of the alternatives.

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Re: Is there a new oil shock on its way?

Postby headprogrammingczar » Tue Mar 08, 2011 1:36 pm UTC

Hawknc wrote:We use the term "emerging countries/markets". It's...spinny, but better than a lot of the alternatives.

It's rather telling though, that the best descriptor we can come up with for these countries is "market".
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Re: Is there a new oil shock on its way?

Postby Hawknc » Tue Mar 08, 2011 7:51 pm UTC

Well, it depends - if you're trying to sell there, "market" is a pretty valid term. :P

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Re: Is there a new oil shock on its way?

Postby Wnderer » Wed Mar 09, 2011 1:49 am UTC

Hawknc wrote:
Wnderer wrote:http://money.cnn.com/2011/03/01/markets/thebuzz/index.htm
"The run-up in oil prices is all due to concerns about 'what-if' situations," Ober said. "None of the fundamentals have really changed."


The coming oil crisis is a lot of malarkey.

It's speculative, but not necessarily malarkey.


Okay it's speculative and I don't buy into it. Barring a long lasting Saudi Arabian civil war or an all out Sunni/Shia war, oil production isn't going to be effected by some political change and reform in the Middle East. It is a very interesting what-if scenario. It's just not a very likely one.

The PBS News Hour had interesting piece on the strategic oil reserves.
http://www.pbs.org/newshour/bb/world/ja ... 03-07.html
Spoiler:
We -- we built the Strategic Petroleum Reserve to combat the 1973 oil embargo. And in those days, we used to -- well, Saudi Arabia, for example, would load crude on to a tanker, and basically it would have an address label on where it was going in the U.S. with a price that had been determined a year or two in advance.

These days, all oil trades in international markets. A tanker can change hands 300 times, so -- in the course of its sailing towards wherever it's going. So, these days, that kind of supply crunch is unlikely. And, so, the SPR was built as this kind of -- like a Fort Knox, as you say.

It's a bunch of fields down in the Gulf of Mexico and underneath our big salt deposits, and mined out of those salt deposits are huge, huge holding tanks for oil. And the idea was that we would put that oil back on the market as sort of our own oil weapon.

What's happened, though, is that there's no shortages of oil now. There's just high prices. And so the big question in American politics is, do we use that to fight high prices, or do we use it only for shortages?

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Re: Is there a new oil shock on its way?

Postby Cleverbeans » Wed Mar 09, 2011 2:20 am UTC

If it gets bad, I figure we'll just drum up some excuse to invade an oil rich nation and prop up a friendly government so we can siphon off their wealth. Maybe award some trillion dollar no-bid contracts to the vice presidents buddies while building up our police force in case the masses start to get out of line. It seems to be the natural order of things.
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Re: Is there a new oil shock on its way?

Postby CorruptUser » Wed Mar 09, 2011 4:07 am UTC

Or we can copy the Russians, steal all the resources of parts of the world we conquered, including the scientists, all while touting equality in everything for everyone.

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Re: Is there a new oil shock on its way?

Postby sardia » Wed Mar 09, 2011 5:45 am UTC

Cleverbeans wrote:If it gets bad, I figure we'll just drum up some excuse to invade an oil rich nation and prop up a friendly government so we can siphon off their wealth. Maybe award some trillion dollar no-bid contracts to the vice presidents buddies while building up our police force in case the masses start to get out of line. It seems to be the natural order of things.

You know, I kinda wish that it actually happened because we aren't getting any iraqi oil or hell, any iraqi related businesses which is a real shame. If they're gonna accuse you of stealing the wealth of other nations, one should at least try to actually steal said wealth. =| I believe the reason we don't is because american corporations need reliability and security when dealing with international things, and of course they have to follow a modicum of ethical procedures. Those 3 demands are things that Chinese and other international corporations have no need for. They are willing to work with corrupt, and dangerous work environments if there is a payoff in the end.

Winderer:
Politics is one of the biggest reasons to change oil production, or at least, oil shipments. OPEC started by cutting off oil to the US during the Israeli wars, remember the oil shocks of the 1970s? Not that it'll happen here, but you should know that it did happen before.

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Re: Is there a new oil shock on its way?

Postby Jahoclave » Wed Mar 09, 2011 7:05 am UTC

Hawknc wrote:Well, it depends - if you're trying to sell there, "market" is a pretty valid term. :P

Which really points out the sort of late capitalist culture we have going where we define people in terms of economic potential rather than as people.

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Re: Is there a new oil shock on its way?

Postby Wnderer » Thu Mar 10, 2011 1:39 am UTC

sardia wrote:Politics is one of the biggest reasons to change oil production, or at least, oil shipments. OPEC started by cutting off oil to the US during the Israeli wars, remember the oil shocks of the 1970s? Not that it'll happen here, but you should know that it did happen before.


You didn't read the text under the spoiler. The oil markets don't work the way they used to. Back in the 70's, Oil was sold directly from the oil producer to the refiner. Today the oil is sold to the commodities market. The oil will have several owners before it reaches the refinery. It's a fungible commodity. Back in the 70's OPEC decided to punish the US by not selling the US oil. Today, if oil production is disrupted it punishes everyone in the oil market.

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Re: Is there a new oil shock on its way?

Postby Hooch » Thu Mar 10, 2011 7:37 pm UTC

Wnderer wrote:Okay it's speculative and I don't buy into it. Barring a long lasting Saudi Arabian civil war or an all out Sunni/Shia war, oil production isn't going to be effected by some political change and reform in the Middle East. It is a very interesting what-if scenario. It's just not a very likely one.


It's not like violence won't make exporting the oil difficult, compromise production sites and offices, or (heaven forbid) the employees decide to take sides in conflict and/or debate, affecting oil production. As far as the article is concerned, I'm not sure as to what it is, but there's probably some sort of practicality behind doing oil business in the Middle East and not making closer drills our priority.

Feel free to prove me wrong. I'm considerably inferior on this forum when it comes to debating, so I might be missing something.
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Re: Is there a new oil shock on its way?

Postby Wnderer » Fri Mar 11, 2011 1:01 am UTC

Hooch wrote: but there's probably some sort of practicality behind doing oil business in the Middle East and not making closer drills our priority.


'Drill baby drill' should not be one of our priorities. Oil being a fungible commodity means world demand for oil sets the price. Gas prices went up in California this week even though their gas comes from Alaska. The US produces 40% of its own oil and imports 30% from the Western Hemisphere and 10% percent from Africa. Saudi Arabia supplies 14% and the rest of the Middle East 6%. The price is still set by supply and demand, so maybe if we increased the supply from US sources that would bring down prices. But lower prices would lower profits and below a certain point, parts of the supply will drop out because it is simply not worth drilling and refining. Lower prices would also increase demand. The opposite is true for rising oil prices. Rising oil prices will bring new supplies on the market of more expensive sources of oil. Rising prices also lowers demand. So oil prices have feedback that make it almost but not quite self regulating. Oil prices have continued to climb over the last few years because of increased demand from emerging markets. Today has been a fairly depressing day with stories of protesters being shot at in Saudi Arabia, but oil prices still went down. News of continuing European economic problems, surprise Chinese economic problems and US unemployment figures point to lower demand. Now reducing the US demand for oil might not bring down oil prices but it would reduce how much we spend on oil.

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Re: Is there a new oil shock on its way?

Postby Heisenberg » Fri Mar 11, 2011 2:45 pm UTC

Wnderer wrote:The price is still set by supply and demand, so maybe if we increased the supply from US sources that would bring down prices.

Not really though. Even if we tapped the vast riches of the Arctic National Wildlife Refuge, best case scenario says we'd drop the price of gas by a penny or two, in 20 years. The market's just too big for us to have a tangible impact right now.

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Re: Is there a new oil shock on its way?

Postby omgryebread » Fri Mar 11, 2011 3:17 pm UTC

Jahoclave wrote:
Hawknc wrote:Well, it depends - if you're trying to sell there, "market" is a pretty valid term. :P

Which really points out the sort of late capitalist culture we have going where we define people in terms of economic potential rather than as people.

Or you know, we believe that free markets in the developing world are great for those people.

The reason "third world" isn't used is not because of PC but because there's no substantial communist second world anymore.

I'm inteterested to see what an oil crisis would do to the exporting countries. In the short term, a spike in prices would be great, but if demand collapses then you'd have serious issues in the middle east as economies collapse.
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Re: Is there a new oil shock on its way?

Postby sardia » Sat Mar 12, 2011 12:28 am UTC

omgryebread wrote:
Jahoclave wrote:
Hawknc wrote:Well, it depends - if you're trying to sell there, "market" is a pretty valid term. :P

Which really points out the sort of late capitalist culture we have going where we define people in terms of economic potential rather than as people.

Or you know, we believe that free markets in the developing world are great for those people.

The reason "third world" isn't used is not because of PC but because there's no substantial communist second world anymore.

I'm inteterested to see what an oil crisis would do to the exporting countries. In the short term, a spike in prices would be great, but if demand collapses then you'd have serious issues in the middle east as economies collapse.

Mostly russia is capitalizing on it. All their worries about their shortfalls went away when this happened. High prices are good for them.

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Re: Is there a new oil shock on its way?

Postby Hawknc » Sat Mar 12, 2011 3:28 am UTC

Yeah, whatever the price, oil demand isn't going to drop sharply unless the global economy tanked with it.


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