It seems pretty clear the Saudis have decided that oil should be priced at $60 and so it is. At that price the Saudis still earn tens or hundreds of billions, but Russia and Iran get crushed, and US producers slow down now production wells. The Saudis win on every side. How long this continues is hard to know since demand will remain muted for a long time given the world economy, and a lack of clarity as to what is really the cost per barrel in Bakken and other fields. In time there may be production cutbacks which wil raise oil prices, but the Saudis can just offset that by producing more. If I am right that the Saudis are manipulating this for geopolitical purposes against Iran, which I believe is their main goal given that Obama is refusing to understand the reality of the Iran intent to develop a nuke, then low oil around $60 will be here for months or maybe longer. This may become that black swan event none of us saw coming.
This is good news mainly for real estate owners as their operating costs decline materially. However, like anything else, there is another side. Houston will now have immediate issues as there will be a lot less office and other demand for quite awhile. Some small oil companies will fold so some tenants will go away just when new ones are not appearing. Jobs and spending in oil producing areas will decline quickly. All those new hotels in N Dakota may not fill up. Pipelines will not get built so fast.
Much more important are the geopolitical results. Russia is now much more dangerous. The Russian economy is crashing and the ruble has crashed. Putin needs to do something to divert attention and history tells us that in these type of crisis the dictator often will resort to create a external threat to rally nationalism. It is possible he may step up actions in Ukraine and Eastern Europe. Iran will become much more desperate as money runs out. If the Republicans set new sanctions early next year, which they may, then Iran is really under pressure if Obama would stop his desperate effort to get a nuclear pact. Iran was desperate when Obama saved them with the nuclear talks and lifting of some sanctions, but this time the Republicans may prevent that. Iran will likely continue to push for the nuclear weapon and at some point soon, Israel may finally act without Obama.
Venezuela will collapse soon and there will be massive unrest and likely a government overthrow. This is the end of the left wing movement in Latin America. It likely also means Cuba suffers badly since Venezuela supplies it cheap oil and Russia cannot come and rescue them when it is getting crushed.
Overall, low oil prices may be the black swan I have predicted, and things in the world will get a lot more messy and dangerous in 2015. With Obama refusing to increase defense spending and refusing to really take the battle to ISIS and other terrorists, things could get more dangerous in the US as a terror attack will be attempted. It is impossible to predict what may happen, but there are some things likely. Interest rates will remain low longer as capital pours into the US as a safe haven. Just look at where the ten year is today vs where all of us thought it would be by now. Good for real estate. If there is a successful terror attack it depends on what it is as to the impact. It is not likely another 9-11 but it could be a mass hack attack and disrupt power grids or other infrastructure. It could be a Sony type attack on a bank or major corporation. They are trying all day everyday. Iran has made it clear it is trying hard already, as are the Chinese and Russians.
I continue to suggest caution and maybe it is time to liquidate some assets and get more liquid. Hard to know, but the risks of low oil prices are well greater than the benefits.
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Joel Ross
Joel Ross began his career in Wall St as an investment banker in 1965, handling corporate advisory matters for a variety of clients. During the seventies he was CEO of North American operations for a UK based conglomerate, and sat on the parent company board. In 1981, he began his own firm handling leveraged buyouts, investment banking and real estate financing. In 1984 Ross began providing investment banking services and arranging financing for real estate transactions with his own firm, Ross Properties, Inc. In 1993 Ross and a partner, Lexington Mortgage, created the first Wall St hotel CMBS program in conjunction with Nomura. They went on to develop a similar CMBS program for another major Wall St investment bank and for five leading hotel companies. Lexington, in partnership with Mr. Ross established a hotel mortgage bank table funded by an investment bank, and making all CMBS hotel loans on their behalf. In 1999 he formed Citadel Realty Advisors as a successor to Ross Properties Corp., focusing on real estate investment banking in the US, UK and Paris. He has closed over $3.0 billion of financings for office, hotel, retail, land and multifamily projects. Ross is also a founder of Market Street Investors, a brownfield land development company, and has been involved in the acquisition of notes on defaulted loans and various REO assets in conjunction with several major investors. Ross was an adjunct professor in the graduate program at the NYU Hotel School. He is a member of Urban Land Institute and was a member of the leadership of his ULI council. In 1999, he conceived and co-authored with PricewaterhouseCoopers, the Hotel Mortgage Performance Report, a major study of hotel mortgage default rates.
