Nouriel Roubini's Global EconoMonitor

Scary Oil

From Project Syndicate:

Today’s fragile global economy faces many risks: the risk of another flare-up of the eurozone crisis; the risk of a worse-than-expected slowdown in China; and the risk that economic recovery in the United States will fizzle (yet again). But no risk is more serious than that posed by a further spike in oil prices.

The price of a barrel of Brent crude, which was well below $100 in 2011, recently peaked at $125. Gasoline prices in the US are approaching $4 a gallon, a damaging threshold for consumer confidence, and will increase further during the high-demand summer season.

The reason is fear. Not only are oil supplies plentiful, but demand in the US and Europe has been lower, owing to decreasing car use in the last few years and weak or negative GDP growth in the US and the eurozone. Simply put, increasing worry about a military conflict between Israel and Iran has created a “fear premium.”

The last three global recessions (prior to 2008) were each caused by a geopolitical shock in the Middle East that led to a sharp spike in oil prices. The 1973 Yom Kippur War between Israel and the Arab states led to global stagflation (recession and inflation) in 1974-1975. The Iranian revolution in 1979 led to global stagflation in 1980-1982. And Iraq’s invasion of Kuwait in the summer of 1990 led to the global recession of 1990-1991.

Even the recent global recession, though triggered by a financial crisis, was exacerbated by spiking oil prices in 2008. With the barrel price reaching $145 in July of that year, oil-importing advanced economies and emerging markets alike faced a recessionary tipping point.

The risk that Israel’s threat to attack Iran’s nuclear installations will, in fact, lead to an outright military conflict may still be low, but it is growing. Israeli Prime Minister Binyamin Netanyahu’s recent visit to the US demonstrated that Israel’s fuse is much shorter than the Americans’. The current war of words is escalating, as is the covert war that Israel and the US are allegedly engaging in with Iran (including killings of nuclear scientists and use of cyber-warfare to damage nuclear facilities).

Iran, with its back to the wall as sanctions bite harder (especially the recent SWIFT and central bank restrictions, and Europe’s decision to stop importing Iranian oil), could react by increasing tensions in the Gulf. Eventually, it could easily sink a few ships to block the Strait of Hormuz, or unleash its proxies in the region, which include pro-Iranian Shia forces in Iraq, Bahrain, Kuwait, and Saudi Arabia, Hezbollah in Lebanon, and Hamas and Islamic Jihad in Gaza.

Recent attacks on Israeli embassies around the world appear to signal Iran’s reaction to the covert war being waged against it, and to the tightened sanctions, which are aggravating the effects of the regime’s economic mismanagement. Likewise, the recent escalation in cross-border fighting between Israel and Gaza-based Palestinian militants could be a sign of things to come.

The next few weeks could bring a reduction in tensions, as the US, France, Germany, the United Kingdom, China, and Russia go through another round of attempts to prevent Iran from developing nuclear weapons or the capacity to produce them. But if this attempt fails, as is likely, one cannot rule out that, by summer, Israel and the US agree that, sooner rather than later, force will have be used to stop Iran.

Indeed, while Israel and the US still disagree on some points – Israel wants to strike this year, while the Obama administration is opposed to military action before facing the voters in November – the two sides are converging on aims and plans. Most importantly, the US is now clearly rejecting containment (accepting a nuclear Iran and using a deterrence strategy). So, if sanctions and negotiations don’t credibly work, the US (a country that doesn’t “bluff,” according to Obama) will have to act militarily against Iran. The US is now providing bunker-buster bombs and refueling planes to Israel, while the two militaries are increasing joint military exercises in case an attack becomes necessary and unavoidable.

If the drums of war grow louder this summer, oil prices could rise in a way that will most likely cause a US and global growth slowdown, and even an outright recession if a military conflict erupts and sends oil prices soaring.

Moreover, broader geopolitical tensions in the Middle East are not fading, and might intensify. Aside from deep uncertainty regarding the course of events in Egypt and Libya, now Syria is on the verge of civil war, and radical forces may get the upper hand in Yemen, undermining security in Saudi Arabia. There is still concern about political tensions rising in Bahrain and Saudi Arabia’s oil-rich Eastern Province, and potentially even in Kuwait and Jordan, all areas with substantial Shia populations or other restless groups.

Now that the US has left Iraq, rising tensions between Shia, Sunni, and Kurdish factions do not bode well for the country’s ability to boost oil production soon. There is also the ongoing Israel-Palestine conflict, tension between Israel and Turkey, and hot spots – particularly Afghanistan and Pakistan – in the wider neighborhood.

Oil is already well above $100/barrel, despite weak economic growth in advanced countries and many emerging markets. The fear premium might push prices significantly higher, even if no military conflict ultimately takes place, and could trigger a global recession if one does.

30 Responses to “Scary Oil”

longolazzaroMarch 15th, 2012 at 11:25 pm

The crucial element is that the deployments Iran / Israel are arranged so as to leave no possibility of changing direction. The positions are being radicalized. This makes the conflict more likely every day and with less peaceful alternatives.

After a 2011 in which wealth has meant above all to exploit the problems of sovereign debt in 2012 could be the year in which some elites accumulate wealth through fear of a global war.

DallasMarch 16th, 2012 at 12:17 am

That would be all I need after doing my taxes and fuming at my 35%. If I were just wealthy it would be only 15%… sigh! We have $4 gal gas already which makes driving to a $12 a day cost.

Jonathan DerryMarch 16th, 2012 at 3:15 pm

Roubini jumps from one crisis to the next. In 2011 he was saying that the euro was going to implode. Now that the euro is looking more stable, Roubini has shifted attention to the price of oil.

SvenMarch 17th, 2012 at 7:01 pm

Try going to zerohegde, talk about a bunch of SLWM ( scared little white men). they have the world collapsing any minute.

Macro-manMarch 16th, 2012 at 3:44 am

Great article but the high price of oil may be high, not only because of a fear factor, but other reasons may be at play. Given where the world economy has been, oil should probably be around 50-60$ pb, possibly lower. No doubt large players are possibly manipulating the futures market and holding the price in….possibly a grand bargain/

Macro-manMarch 16th, 2012 at 3:49 am

Some marketing research should be done…the price has been too high…even before the Iranian tensions…who benefits from high oil?….Middle east…Iraq…..Russia…..Makes the push for gas easier in the US also..

RobertMarch 20th, 2012 at 8:41 pm

Have you guys ever heard of supply and demand. Supply has been going nowhere for years and the Chinese have a million more cars on the road.

Ron ShookMarch 16th, 2012 at 7:46 am


It is most gratifying to see a mainstream economist start to really get the primacy of oil in our economic civilization. May you go on to even greater heights. I will watch what you say with even greater interest.

Aegean1972March 16th, 2012 at 9:39 am

I agree with the article and on a funny note :

you think 4$ a gallon is high? Its almost 9$ a gallon over here (athens, GR) after the new implied taxes.

Thanks Troika!! We really appreciate paying 150$ to fill up a compact-car's gas tank.

rodeneugenMarch 16th, 2012 at 9:55 pm

Welcome to stagflation

The oil price is not so much about the fear premium as about limited recourses. Just ten years ago, only 20 percent of the world population the wealthy Europe, US, Japan, and Asian tigers countries, enjoyed decent standard of life and freedom of transportation, (private cars), since the middle of the last decade the Chinese population started gradually, to join the club of wealthy nations. It seems " butterfly effect ", caused dramatic rise on oil prices, (and other commodities as well), at 2007, when within a year it grow from 50 US$/barrel to 150 US$ (other commodities behaved accordingly), dropping back to 30 US$/barrel immediately after the collapse of Lehman Brothers.
It is inevitable that any attempt by the emerging economies to achieve the same level of consumption as the wealthy countries will create competition for raw materials and energy sources, and it has to cause sharp increase in their prices.
It seems that at today’s technologies, the level of consumption in the world is close to its upper limits and our planet is having difficulties carrying on with the already existing appetite for consumption in the level of wealthy nations. It seems even more improbable that it could cope with additional over-consuming people, so necessarily any attempt to increase it in one region will cause other region to decrease its consumption level.
Yet in today's world, about 4 billion people living in China, India, Latin America and the South-East Asian, people that demand the same level of consumption as the population of wealthy nations, especially since they are the producers of most of the consumption products that they enjoy. These regions with young and growing populations (in contrast to the ageing and stagnating populations of the wealthy nations), are about to take over the leading role in the world economy within few years and will demand accordingly their share in the consumption. It is necessary to say, that while an increase of consumption is politically and socially easy, its decrease is politically almost impossible. But as in the past, the necessity will happened and eventually the wealthy nations will give up part of their share of consumption in favor of the emerging nations. The only way it can happen is by price increase of commodities and the final products as well, or in other word stagflation.
The current economic crisis, started this process of more even distribution of the consumption in the world, since it had hit primarily the most wealthy regions, and less so the emerging economic regions. The economic stimulus made by US and EU moderated this trend to shift the use of resource to the developing nations, but it will have only temporary effect. Already at 2009 the Chinese car market became the biggest in the world. What we see with the oil prices is only continuation of the process that started in 2007 and was interrupted at 2008 by the collapse of Lehman Brothers and the economic crisis that followed it.
My understanding is that the oil price rise is indication that the US and EU economy is out of the crisis, and the world is back in the pre crisis economy level of 2007, but with the obvious shift of consumption from the wealthy world toward the less developed world.

Rassegna web: il Tesoro paga il pizzo a MS; trappole, pericoli, anomalie del mercato secondo NR e JW. « Trading WarriorsMarch 17th, 2012 at 4:07 pm

[…] In questo intervento di Nouriel Roubini su che abbiamo già segnalato giorni fa, il Dottor Destino redige l’elenco implacabile dei nuovi iceberg che costellano il mare solcato dalle navi degli investitori: impennata dell’inflazione in Eurolandia come conseguenza del rialzo delle commodities, rallentamento della locomotiva cinese, inceppamento della ripresa negli USA, e soprattutto la volatilità nel mercato dei prodotti petroliferi. L’argomento è strettamente legato al precedente, perché secondo Roubini le misure di allentamento quantitativo non fanno altro che tamponare provvisoriamente i problemi rendendo più violenta la deflagrazione quando i nodi verranno al pettine. […]

Scott SchultzMarch 17th, 2012 at 7:49 pm


More people are saying that we are entering a "Bear market" for bonds. Is this your view as well?

DONNAMarch 19th, 2012 at 8:07 am

always politice make problem in economy..but i have to say the oil price was .one of the problem .MY personal opinion is this is not new ..and is not new too Iran play a dangers game in political world (not israel)..I think we have to see with very seriuse eye what happening in MIDLE EAST.and i don't think is just oil war ..but dangrues Religion war.(think about this) i have read NOSTRADOM..something reminde to me what he EVERY TIME WE HAVE TENSION POLITICE OIL PRICE IS IN TENSION TOO..THANK YOU

ChrisMarch 20th, 2012 at 10:13 am

I seem to recall the 'great western nations' of this world professsing that there was a potential armegeddon going to occur if Saddam Hussein was not stopped from using a range of WMD's. The aftermath of Desert Storm proved that ther was no cogent evidence of there being a stockpile of WMD's, just an expansionist plan by an overzealous dictator trying to exercise his purported strength by taking out Kuwait to sequester its oil reserves.

Are we really sure that Iran is in fact intending to produce WMD's as a by-product of its nuclear ambitions on the domestic front to shore up the country's future energy needs post depletion of its finite oil reserves.

There is a lot of speculation about what the Iranian Governmnet is intending, but is the intelligence accurate or are the facts being distorted in an attempt to topple an already radical autocratic regime. I certainly would not put it past Iran to sink ships in the Straits of Hormuz. I just wonder who's bluff is being called in this very serious game of brinkmanship, the outcome of which will undoubtedly plunge the world economy into an economic depression, the magnitude of which will take decades to recover.

David T. NowakowskiMarch 20th, 2012 at 11:56 am

It is pretty amazing that vehicle miles driven in the US continue to decline:

However, the U.S. is less and less important — there is a positive demand growth story too, driven by EM. Look at any country's automobile sales (e.g. China, running at 1.2 million new cars per MONTH triple the 2007 rate, Brazil at 300k+ per month which is double the 2007 rate, etc).

Overall, world consumption of light distillates only dipped back in 2008, and since then has grown at a 'healthy' 2-3% clip; Europe stagnant, US growing a bit, China soaring at >10%.

materialsriskMarch 21st, 2012 at 9:51 pm

If fears over conflict with Iran have been the key factor driving up oil prices then I would have expected a decline in the perceived chance of conflict to have resulted in a fall in the oil price.

However if you look at InTrade's contract on the probability of an Israeli attack on Iran by end 2012 the implied probability has fallen quite sharply since mid-February by 10% to 40%. Yet the oil price (Brent) has stayed stubbornly high around $125 per barrel.

See chart on my blog here

Although I believe concern over Iran has focused traders attention on the tight supply fundamentals I think it is easy to get drawn into the 'tail risk' scenario. The US war simulations reported in the NYT highlight this fact with the potential for a much wider regional conflict if Iran is attacked.

Seth WagonerMarch 23rd, 2012 at 10:26 am

Chris Cook, former compliance and market supervision director of the International Petroleum Exchange, has a fairly fascinating explanation for the state of the oil market, which he says is likely to crash downwards sometime soon. He's been blogging on Naked Capitalism lately. Recommended.

AlfredRosenbergApril 6th, 2012 at 10:31 am

Nouriel, you know better than that.
The tensions are orchestrated by the US oligarchy and they are a function of
a) the need to contain Russia/China
b) the need to create demand for the USD.

And just in case this latest phase of PNAC doesn't work out – you know who the scape goat will be, dont' you?
Clue:… – but you guys are born survivors – just wait 1,000 years and no one will remember this shit.

Mitch MillerApril 7th, 2012 at 7:05 pm

Agreed the price or oil is the result of speculation of conflict in the Middle East. New oil reserves now coming to market (think Brazil) will meet demand for the next few decades if they are properly managed. If some resolution to the Iranian conflict becomes reality, expect a collapse in the price of oil. Unfortunately, another collapse in the price of oil could send research on alternative energy sources into hibernation again. The US government should be funding energy research in the same way, and at the same levels, that it funds medical research in academic institutions. IMHO the search for the holy grail of clean energy is akin to a victory in the war against cancer; could be a long time in coming.

BMW repairsMay 18th, 2013 at 10:45 am

More of use in fuel vehicles certainly causing serious problems for the fuel industry. The fuel or crude oil requirement for the automotive industry is quite high in current days. People preferring more of diesel and petrol vehicles resulted the same. So we need to use more of public transportation. If we want use personal vehicles then need to use electric vehicles.

RessourcenAugust 9th, 2013 at 5:13 am

Now in In Germany, the question remains whether a banking union will require a revision of the EU's basic treaty, a position that is supported by German finance minister Wolfgang Schäuble!