Beware of Another Oil Shock

Earthquakes, bank runs, riots and choppy markets.  What a week!

With the messy situation in the Middle East, more market participants are expecting sharply higher oil prices in the near term.  The latest people to put out a bullish forecast for oil is Nomura.  As reported by the UK Telegraph, Nomura has stated that should Algeria's production be shut down together with Libya's, then oil prices could hit US$220 per barrel.

To me, if oil were to hit that level, it would be a quick spike up that would kill the global economy.  I doubt it will be a slow climb because if the world economy could not withstand a price of US$147 per barrel back in 2008, it will definitely not be able to withstand that price today given that it is in a far weaker shape today, let alone US$220.

That said, what was more interesting in the Telegraph report was the following quote:

Jeremy Leggett, a leader of the UK industry task force on peak oil and energy security, said the Mid-East crisis "shows the extreme fragility of the global system. People don't realise how close we are to a potential precipice if this unrest reaches critical mass in enough OPEC countries. Governments need to draw up emergency plans and get cracking on proactive measures while we still have time," he said.

While some Singaporeans rightly fear the spectre of a worsening inflationary situation, there could be worse to come.  At the community, family and individual levels, we need to think of ways to deal with these challenges with minimal reliance on the government.  This is not the time to complain about the inadequacy of the budget handouts, nor boast about the popularity of your political website vis-a-vis the PAP, nor fight amongst yourselves to see who gets to be the boss.  And no, the real danger to the country is not when the PAP implodes, as some  have suggested.  There are far bigger storms out there.