Economic and Market Risk
The use of drones against Saudi Arabian oil facilities changes the economic-market risk significantly.
Until now the oil producers have done an excellent job of preventing terrorist attacks from disrupting oil supplies. But the use of drones significantly changes the risk of future oil disruptions. How do we prevent future drone attacks on the choke points in the oil supply line?
I, for one, am surprised that the stock market reaction has been so muted.
Am I wrong in believing that the game has changed?
Headlines say prices are up 20% today, Saudi is 12m barrels a day out of over 80m production, and “half” of their production went offline. Other producers can profitably put production online when certain price limits are passed.
It actually seems to me like an overreaction. The 12% weekend price change was probably more in line with reality.
End of day +15%. Seems fine.
Israel can sell them an Iron Dome system
So you do not think the risk of oil supplies being disrupted has changed.
You were already discounting drone attacks?
Is it really that different from the truck bombs, actual air attacks on Sudanese pipelines, terrorist and militant attacks in Nigeria on oil facilities, yadda yadda yadda?
The Saudis have been involved in a war with Yemen for years, and just last year they allegedly shot down a number of missiles “fired on cities.”
An air attack by terrorists / military enemies on oil facilities isn’t inconceivable, it’s probably more in the realm of inevitable.
Remember, investment leads consumption. NewDeal could learn that lesson. Higher gas prices may slow consumption down a bit, but a 5% contraction in nonres investment is 100% recession and is much more dangerous. Its effects would spread throughout the “system”. That is the impending auto recessions effect. Then that effects the entire economy as junk corporate debt becomes unusable.
When amateur hobbyists can build drones that move at 100 MPH and cost $500, then you have a problem. A nest of five hundred dollar drones can remove a squadron of F22s in Qatar from the battle field. The US military is just now building a defense, it has none and the F22 squadron, all 10 billion, are sitting i a Qatar airbase.
Who is sending in the drone to disrupt F22 opertions? Anyone, anyone with access to Dollar Tree foam boards, glue, online purchase of flight electronics include GPS and digital inertia, all cheap. I really mean anyone, even a person in a robe and sandals, all she needs is a garage and be handy with linux.
All your fighter investment is gone, all 4 trillion of it, the only thing usable in our arsenal is the good old rusty B52s again because a B52 can stand back at high altitude and release and recover drones. Five foam board kamikaze drones at 100 MPH takes out an F22 by collision eventually, or at least makes the F22 stay far back.
Yes, the game has changed. There’s lots of oil, but prices have been too low to sell it at a profit. It’s like investment capital. There’s lots of investment capital, but returns on investment have been too low to lend it at a profit. It’s pretty standard economics.
P.S. The timing of this attack with respect to the firing of the Saudi oil minister and the delayed Aramco IPO is horribly suspicious. I expect repairs to take a lot longer than one would expect given the damage. It worked for Enron. It probably won’t work for the Saudis.