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Page added on August 30, 2007

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Peak Oil Passnotes: Debt Contagion in Crude?

There are a series of issues that are confusing the oil market at the moment, and just to add to the confusion come the problems with U.S. debt. The main difficulty with U.S. debt is the same as predicting the path of the storm 94L, which is threatening to become a tropical depression, then tropical storm, then hurricane. Just how far will U.S. debt develop? Will it be blown away amidst the markets or will it be a financial cyclone that zaps consumption?

U.S. debt can affect the oil market in a number of ways. First the obvious. It could cause a recession if it is large enough, either in the U.S. or in the connected markets like China. This could cause a downturn in economic activity and therefore a drop in the price of oil as demand falters.

There are signs, as we have said before in this column, that a recession is coming. But once again in the spirit of 94L, how bad will it be? Interest rates are up, debt defaulting is up and some commodity prices remain high. Not just in energy but also in wheat and meat. But this does not mean that oil prices are going to be hit. As we shall explain later.

Secondly as easy credit dries up certain sectors that have benefited from the rush of cheap money will be hurt. That could be real estate, it could be retail, it could be travel or it could be energy. What is likely that small companies with no cash will find themselves swallowed up by bigger boys still able to get access to some funding. Small companies – and we are not talking about U.S. independents like Apache or Murphy, they are too big – are too vulnerable in times of economic difficulty.

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