The oil tiger

As Saipan’s gas prices hover at the $2.74 per gallon mark, and fuel surcharges are debated for CUC, you might ponder this question: Is it possible that oil prices might actually fall?

Just for fun, I thought I’d ponder a scenario for that possibility.

For oil to get cheaper, we’d need to see the global demand for oil fall. And the way that springs to mind for that to happen is for oil’s most loyal customer, the United States, to start losing a thirst for the stuff. So how could that happen? A serious recession could do the trick. And given that the nation is riding a scary, hairy real-estate bubble, serious trouble is probably on the way.

That’s sure not an original concern I’m offering, and it’s an issue of global proportions. The cover of the June 18 issue of The Economist magazine features an ominous depiction of a brick plunging through air toward the ground. Printing on the brick: “House Prices.” Text on the magazine cover: “After the fall.” This is a very compelling read.

I’m not saying that you should give a rat’s butt what people in Wichita are paying for their houses. I sure don’t care either. But Saipan’s gas prices, and the Asian tourism market, are tied to this stuff.

Why? Because this is possibly the biggest financial bubble in recent history. The U.S. financial system has become tied to this irresponsibly bloated mortgage bubble, and when this sucker pops, the entire economic orbit of the world is going to start wobbling. America has swallowed a deadly amount of debt, and it’s only a matter of time before the poison claims the victim.

And when the financial dying starts, consumers won’t be buying those gas-sucking SUVs. And the oil slurping factories that produce them won’t be producing them anymore, or at least as many of them (heck, General Motors is already shedding 25,000 jobs as it is). Trucking, shipping, airline travel, all these oil-sucking realms will get smaller straws.

Yes, oil is the lifeline of any major economy, but it’s a two-way street, and a sick economy won’t need as much of the black blood as a healthy one does.

Meanwhile, any such serious problems for the U.S. economy will erode the export base, hence the demand for oil, for Japan and China. China’s 9 percent or so a year annual growth won’t be as high if (when, actually) Uncle Sam slinks to the poor house after his housing bubble bursts. China’s lush and profitable American market is essentially bankrupt, but the U.S. real estate bubble has covered up this stark fact.

So the dots are pretty easy to connect if you’re looking for a scenario in which oil actually goes down, not up, in price. And I think it’s a logical scenario, as far as it goes…

…but it may not really go far enough. Dovetailed with this scenario would also be a U.S. financial crisis, sparked by mortgage paper going bad, that would send the dollar to a death plunge. In this case, I wonder if dollars will continue to be the currency of choice for pricing oil. If not, then all sorts of weirdness will crop up, and I’m just not up for pondering that right now.

Yes, there is probably a large war premium built into oil prices now, but it looks like that may be here to stay. Given that factor, I don’t think oil will get substantially cheaper unless a serious recession somewhere (China, Japan, U.S.) triggers a fall. In this realm the U.S. housing bubble looks like the most likely factor lurking out there. But—that’s all I really know, and there is no reason that oil can’t climb substantially before any recessionary forces actually hit. Watching oil is like grabbing an economic tiger by the tail.

And have I mentioned the Chinese? Yeah, a few times. It just hit the wires that the Chinese have placed a bid for the mighty American Unocal oil company. Whooie, I can smell controversy brewing over that move.

Yep, a tiger by the tail all right.