by Michael Arbow, MBA
Partner, RSD Solutions Inc.
Over the past two months the markets have witnessed rising oil prices and a quick snap correction. The culprit cited for the rise is unrest in the Middle East (still unresolved) and for the fall a slowing of the US economy. These are immediate term issues which will eventually fade in the wash of time and are only masking the continued upward movement of oil due to a world which if not at peak oil then is at least increasing reserves at a rate less than usage increases. Surrounding this news is China, a growing economy that requires only a 1% increase in oil demand to wipe-out a 10% decrease in US use. So how will China get the oil it needs to continue growing?
The idea sported by Jeff Rubin (see link) suggest that the Chinese slow down on their uptake of US government debt. By doing this the US government has two options either a) print money and thus debase the dollar and therefore raise the US dollar price for oil/gasoline or b) reduce the government debt which in itself will either cause the economy to slow and/or US consumers to be taxed more and thus less able to afford gasoline (already on average 9% of US disposable income up from 5% two years ago).
Either solution will result in a weaker US dollar relative to most currencies and an economy that can no longer afford some of imported luxuries. The risk questions that arise from this scenario are numerous and can only be reduced by some positive US Black Swan event (?). I believe the path has been decided it is only the knowledge of the timing that remains elusive. In this volatile global village even smaller local firms can be take a “hit”. How is your risk team looking at this eventuality? Or is it still too far out there to consider?
For more on Jeff Rubin’s views on this click on the Globe and Mail link:
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