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Author`s name Dmitry Sudakov

World to face super oil price shock that will scuttle any economic recovery

Several things have now moved to set the world up for one of the worst run ups in the price of oil and all coming by the second half of 2009.

As everyone knows, oil is plunging, in part due to over production during the high times of the recent past. This is also partially due to the strengthened dollar's action, since that is what oil is valued in. The world economic depression has also done its part to further drive down the already staggering price.

As oil prices drop, many oil producing areas, on the fringe, such as the Canadian oil sales, no longer become cost effective. Coal gasification, arctic drilling and deep reserve harnessing all face similar fates: closure of these projects. The problem here, of course is not that they cannot be opened but that production cannot be resumed quickly and will again take time to rev back up.

The economic world collapse has also driven down demand for oil and many new, affordable projects are being put aside as existing production is quickly scaled down and alternative energy sinks faster than a holed submarine. These too take time to rev back up. Oil companies simply do not react quickly.

Enter the US Federal Reserve and the American elites, hell bent on escaping depression by mass liquidity: read printing money as fast as they can cut down whole forests for paper.

There is some chance this may rev production back up, before the hyper inflation hits. Further, as cash is king becomes again cash is trash, there will be another mass movement into commodities, such as oil.

What the world will suddenly face in mid 2009 is a massive demand for oil, coupled with a spike in its price due to the mass liquidity of the dollar. Supplies are already low, production is being cut back and development is idling faster and faster.

When demand is high, pricing pressures already pushing up and supply falling behind quickly, you are now looking at a serious oil shock. No, this will not be good for anyone, except maybe Russia and a few other states who produce oil and either do not sell it in dollars or are themselves not pegged to the dollar.

While any US/European recovery will collapse back down by a massive spike in energy costs that will be just one more crushing blow to the people and industry, countries like Saud Arabia, pegged to the dollar, will face inflation which will make the US hyper inflation seem modest. This will force them to either fall to revolution and civil war or to decouple from the dollar.

This will, in turn, of course cause even more market chaos as reserve currencies get sorted out. For the dollar it will be the end, as the hyper inflation and the decoupling will combine into a perfect Zimbabwe experience.

Hold on for the ride folks, we've passed the warm up hills...its about to get real interesting.

Stanislav Mishin

The article has been reprinted with the kind permission from Stanislav Mishin and originally appears on his blog Mat Rodina

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