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Coming 'oil glut' may push global economy into deflation

Ambrose Evans-Pritchard usually hits the nail on the head with his gloomy assessment of global economic prospects.  Here he is talking about the downward pressure on oil prices and the potential for this to cause deflation. 

Enemies of renewable energy will be all over this and will predict the end of renewables in the developed world.  We don’t agree.  Renewable energy is one of the reasons that oil demand is falling.  Germany is the prime example of an industrialised,  first world economy which has successfully reduced it’s dependence on oil.  We also don’t see falling oil prices lasting.  One inevitable result of lower oil prices,  or lower prices for any commodity for that matter,  is reduced supply.  The oil which remains in the world is harder to get at and costlier to extract.  Lots of relatively new fields are barely viable at $100 per  barrel,  at $80 it just won’t be worth the effort.  Without new exploration,  supply will dwindle and prices will climb again.

On a geo-political level,  we can expect fun and games in the Middle East as the Saudis find an uncomfortable spot between a very hard rock and a very hard place.    Low prices will affect the kingdom’s ability to continue to keep it’s restive population quiet with state largesse.  Higher prices increase revenues for ISIS which presents an existential threat to the House of Saud.

One thing we know from history is that just as western economies get used to falling or rising oil prices,  the oil market always has a surprise up its sleeve.  

One day it would be nice if we could observe the rollercoaster that is oil prices and simply shrug our shoulders.  For the time being,  we should prepare for more volatility.

Read the sage’s grim words here..

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