Brace for the knock-on effects of the oil price slide

The low oil price, coupled with Australia’s LNG gas disaster, will have wide-ranging repercussions and potentially see some companies go broke.

The full ramifications of the recent fall in the oil price will unfold in the next few months along with the new Greek-driven European crisis.

But let me give you a sneak preview of some of the events that could be ahead if oil stays at present levels or goes lower. Domestically we will look stupid because we are exporting our gas at a loss, but we will have to pay top price on the eastern coast for local gas. I will come back to that issue later.

Despite last night's small recovery, there is no doubt that the Saudis have decided to drive down the price of oil and ause a large number of American shale oil and gas producers to cease production and possibly go broke. The losses that will create in the American banking system will make it difficult to resume production quickly at the levels that were planned.

This has a similarity to what BHP and Rio Tinto are doing in iron ore, so we should not express moral outrage against what the Saudis are doing.

But low oil prices have a much wider global dimension than falling iron ore prices. It means that a large number of countries in the Middle East, including Iran and the Iraq/Syria/ISIS mess, will be starved of cash. Full-scale military ventures will be harder to maintain, but low-cost terror will probably explode in the wake of the poverty that will be created. There is clearly a risk that Middle East community anger, rather than being directed at the Saudis, who are depressing the oil the price, will be directed at Israel.

Then, when we go to the higher cost African producers there will be further misery and possibly terror. In the case of Russia we should not forget that, while the Russian communist system was unstable, the actual trigger for its collapse was a dramatic fall in the oil price in the late 1980s.  We have already seen the collapse of Russian currency, indicating Russia is in for a very hard time. Dictators who face difficult economic circumstances are very dangerous and often paper over problems with nationalistic-based military aggression. That is not a prediction, just a risk.

Back in Australia we must appear to outsiders to be about the stupidest nation on earth. We have exported most of our gas at prices that were linked to the oil price, which means that we will lose money on the exports because of the bloated cost of our huge LNG plants and the high cost of extracting coal gas.

Having exported our gas at a loss we have limited gas for our domestic eastern states requirements. We may have to pay high prices for gas to enable new fields to be developed. So here is the lucky country that, having exported our gas at losing prices, must pay through the nose for domestic gas. And if the export price falls far enough we might even have some of our export gas companies go broke.

When the community realises that the combination of bad federal and state government policies plus appalling corporate management has created this situation, there will be great anger.

But Australians accepted high power prices, so I guess they will put up with high gas prices, even though it will cost jobs.

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