The Earth Shift

Talking about the financial and economic impacts of the first Oil Shock

We should make it very clear at the outset that you will hardly be able to scratch the surface of these impacts in a document like this; this will really only be a very top-level view

The Oil Shock will come out of the blue, and it really will be a shock which will reverberate around the globe.

The immediate concern obviously will be the securing of sufficient oil supplies into the future. However very quickly of course the effects will be felt across the board, particularly across all types of industry: manufacturing, travel and so on

This will obviously cause a good deal of alarm, as you can imagine, because it will happen so quickly, and nobody will really be prepared for this type of event

We thought it might be useful to look at it at three different levels: that of the country; of companies and corporations and of course the individual

So, the covid pandemic has placed an enormous burden of debt on the state in many countries. We’re not going to hazard a guess at the borrowing but it’s certainly in the hundreds of billions of dollars. This will cause a problem as it will restrict the amount of support available at government level

At the corporate level, the effects will be wide-ranging.  For example if you’re trying to fly an airline, but you have no idea of the availability or cost of fuel, you have a serious problem. Many types of manufacturing will be consuming oil not only as a fuel, but also as a raw material. So many components, so many manufactured goods rely on oil for their production. This will really very quickly become chaotic

You have seen over the last few months how interdependent industry actually is. The episode regarding CO2 in UK is a very good example of this, in that certain types of manufacturing process have by-products that are extremely important; they may even be more important than the manufactured item itself. This will be a very challenging time because of this serious interdependence

Finally on to the personal level: Personal levels of debt are high; the cost of borrowing over the last few years has been very low. Since the financial crash of 2007/8 a lot of work has been done to try to ensure such an event never happens again; ‘stress testing’ is one such activity that has been carried out. However, there will be other failures in the sector; that’s the seriousness of this event and the impact will be felt extremely widely
Individuals will immediately be concerned for their employment. They will be looking for some security in employment and obviously security of income. There will be turmoil for quite a period of time and so what you will see is that a lot of discretionary purchases will be put off

There will be a quite dramatic slump in the economy simply because demand will not be there from the consumer, and in many cases the supply from the manufacturer will be suffering from recent shortages as well as this latest headache to deal with

So, this document hasn’t even really begun to explore what is actually going to happen post the first oil Shock, which is literally anytime now. But it does give you a flavour of where we believe things will be moving