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Low Oil Has Great Risks

Low oil prices bring geopolitical risks

By Joel Ross | Updated on December 13, 2014

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. 

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