Will The Day Of Rage In Saudi Arabia On March 11 Send The Price Of Oil Into Unprecedented Territory?

Pakalert 3

The Economic Collapse

The price of oil is shaping up to be the number one economic story of 2011, and right now the eyes of the investing world are closely watching the developing situation in Saudi Arabia.  All of the other recent Middle East revolutions have been organized on the Internet, and now all over Facebook and Twitter there are calls for a “Day of Rage” in Saudi Arabia on May 11.  The Saudi monarchy is attempting to head off any protests by promising to give $37 billion in “benefits” to the people and by publicly proclaiming that all political demonstrations are specifically banned.  In addition, the Saudi government is stationing thousands of security forces at various potential “hot spots” around the country.  So far similar measures have not done much to quell unrest in other nations in the Middle East, but Saudi Arabia will be a true test of the revolutionary fervor that is sweeping the region.  The Saudis have a long history of brutally repressing their own people.  They simply do not mess around.  So a revolution in Saudi Arabia will not be nearly as “easy” as it was in Tunisia, Egypt or Libya.  However, if a revolution does sweep across Saudi Arabia, it is going to send the price of oil into unprecedented territory.  Saudi Arabia is the number one exporter of oil in the world, and if their oil fields get shut down even for a little while it is going to have a dramatic effect on the global economy.  With the world already on the verge of a major sovereign debt crisis, the last thing it needs is for the price of oil to start soaring into the stratosphere.

Right now the investing world is not sure what to think about all of this, and financial markets do not like uncertainty.  One piece of really bad news could send markets all over the globe crashing down.

Speculation in oil futures is absolutely rampant.  A recent report on CNN noted the following….

The speculative fervor is so remarkable that the big trading firms now have nearly twice as many long contracts open as they did in 2008, when oil spiked to $147 in the summer, a development that either foreshadowed or caused the global economic meltdown, depending on how you look at it.

In particular, the number of investors that are betting that a revolution in Saudi Arabia is going to send the price of oil up to $200 a barrel has exploded in recent days.

$200 a barrel?

Are people actually betting that is going to happen?

The all-time record is only $147 a barrel.  Just a few months ago it was absolutely unthinkable to most economists that we could potentially see $200 oil in 2011.

But it would be a mistake to assume that a full-blown revolution is guaranteed to break out in Saudi Arabia.  Remember, this is a nation that has a very, very long history of denying even the most basic freedoms to the people.

For example, in Saudi Arabia the practice of any religion other than Islam is strictly forbidden.  By law, citizens of Saudi Arabia are not permitted to change religion.  Even foreign visitors are forbidden to openly practice any other religion.  It is a whole different world.  You cannot go to the store and buy a Bible in Saudi Arabia.  In fact, if you try to pass out Bibles in Saudi Arabia you will be thrown into prison.

Beheadings and other brutal public executions still happen in Saudi Arabia to this day.

So if you plan of being a revolutionary in Saudi Arabia you had better put your big boy pants on, because the Saudis play hardball.

Much of the rest of the globe is desperately hoping that a revolution does not happen in Saudi Arabia because the global economic situation is precarious at best.

In Europe, if the price of oil causes a significant economic slowdown right now it could have global implications.  Moody’s Investors Service just slashed Greece’s debt rating three levels all the way down to B1.  But Greece is far from alone.  Several European governments are finding it much more expensive to finance their debts these days.  We are right on the edge of a major European sovereign debt crisis and the chaos in the Middle East could potentially be just the thing to spark a panic.

The United States could feel a rise in the price of oil even more than Europe because the U.S. economy is so spread out and it is so dependent on products from overseas.

Did you know that in 1960 only 8 percent of the things Americans bought were made overseas but that today 60 percent of the things Americans buy are made overseas?

It’s true.

So what would happen if the cost of transporting all of those products suddenly doubled?  All of the products we buy must be transported somehow, and a rise in transportation costs will be passed on to U.S. consumers.

But the truth is that the pain is already here.  Already, millions of American families are starting to feel some very real financial pain from the chaos in the Middle East.

From February 18th to March 4th, the average price of gasoline in the United States rose 33 cents.  That was the biggest two week increase ever recorded.

Ouch.

The rise in the price of oil has some broader economic implications as well.

The more the price of oil goes up the bigger our trade deficit is going become.  As the trade deficit gets bigger, that means that more money is going out of the country and less money is going to support American businesses and American workers.  When American workers lose jobs, that means that they aren’t producing wealth anymore and they aren’t paying taxes anymore.  Instead, they become a drain on the system as they start receiving government handouts.

When millions of Americans go from being productive, taxpaying workers to unemployed welfare cases it causes our federal budget deficit to become even larger.

Most Americans do not understand how connected our trade deficit and our federal budget deficit really are.  One feeds right into the other.

Unfortunately, the Federal Reserve seems to think that the solution to any economic problem these days is to print more money.

According to Atlanta Fed President Dennis Lockhart, if the price of oil goes up high enough, it could force the Federal Reserve to do even more quantitative easing.

Really?

One of the reasons why the price of oil and other commodities has been going up over the last six months is because of all of this reckless money printing.

Now Lockhart is saying that because of the oil price increases they may have to do more money printing?

How bizarre is that?

Unfortunately, several other top Fed officials have dropped hints about a possible “QE3” lately.  It just seems like the insanity never stops.

Let us hope that the Fed does not go there because the U.S. dollar is falling apart fast enough already.

In any event, the rest of 2011 is certainly going to be very interesting to watch.

Even if a revolution does not happen in Saudi Arabia, the price of oil will most likely continue to slowly move higher just as it has been doing for months.

But if a full-blown revolution does happen in Saudi Arabia, it could literally change the global economy almost overnight.  The entire world financial system would be thrown into a state of chaos.

Oil is the lifeblood of the world economy.  Without a continuous supply of very inexpensive oil, life as we know it would dramatically change.  Most of us just assumed that we would always live in a world where we would always have an endless supply of very cheap oil.

Well, the times they are a changing.

You had better buckle up because it is going to be a bumpy ride.

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3 Comments »

  1. Alexander July 17, 2011 at 12:11 am - Reply

    It is now July 16, 2011 …..
    March 11, 2011, has since long passed, and what is that you say?! No revolution took place in Saudi Arabia?! WOW! Now there’s a surprise!

  2. Alexander July 16, 2011 at 11:47 pm - Reply

    The United States is sitting on more oil than ever came out of, or is still remaining in all of the Middle East.
    If, an uprising takes place in Saudi Arabia and the price of oil becomes, ‘The Sky is the limit’, all the Environmental morons will be pushed aside, or better still, thrown into mental institutions; drilling for oil will at last take place ALL over the United States.
    Then the excrement will surely hit the fan, because the United States and Canada, will still have their fields of grain stretching as far as the eye can see. Those now driving gold, or platinum plated Mercedes will be begging to exchange their worthless oil for food.

    When Maria Antoinette was informed that the French peasantry were in a state of revolution because they had no bread, she supposedly said… “Well, let them eat cake”.

    ……………..So………………… Let them eat sand ………………………………….

  3. James M Nunes March 10, 2011 at 12:55 am - Reply

    This next war is going to be fought over oil. If the flow of oil was ever shut off, the financial base of the economic system would collapse. The price of food would ascend into the stratosphere. The hundered dollar bill would be the new dollar. This is a following market basket of what groceries and what a gallon of gas would cost the consumer in a climate of hyper-inflation. The new dollar would be $100.00, $10.00 a gallon for gas, $10.00 a gallon for heating oil, $10.00 for propane, $10.00 for a loaf of bread, $10.00 for a gallon milk, $10.00 a pound for hamburger, etc. These prices are a fact of life already in Nome, Alaska. It cost you a $100.00 a night just to rent a hotel room. In the Matnuska Valley, Alaska 18%-20% of the people are receiving some form of public assistance. There are a couple hundred families a day that are migrating to Alaska. This is what the spoon fed circus news media that is owned by the greedy commercialist does not tell the general public the truth. They keep telling the people that everything is fine and that the recovery is on the way, so they can keep fleecing peoples pocket books. If they were to tell the people the truth, their pocket books would close. It would be bad for business. Either way, we are going to lose through devaluation of the dollar. When the Titanic sinks they will reaching for life preservers of gold and silver. There will be run on the banks. That is another reason that they don’t want to tell people the truth.

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