$200 oil as a black swan

In a column published just after the SPA statement, Saudi-owned Al Arabiya channel’s General Manager Turki Aldakhil warned that imposing sanctions on the world’s largest oil exporter could spark global economic disaster.

“It would lead to Saudi Arabia’s failure to commit to producing 7.5 million barrels. If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure,” he wrote.

Financial Post, 14 Oct 2018

$200 oil was not on any list of probable outcomes I’ve seen or considered recently. I think it’s fair to say that $200 oil – if it were to happen – would be a black swan event. And it would usher in a massive global economic contraction that would result in serious political upheaval nearly everywhere.

So we’re talking about an event with serious political and economic ramifications.

The cause: the alleged murder of Saudi dissident Journalist Jamal Khashoggi in Saudi Arabia’s own consulate in Istanbul.

Embassies and consulates are supposed to be places of refuge for a country’s citizens. The concept that a person would go to his consulate and be murdered y his own government is only consistent with a repressive regime of immense brutality.

And so, allying with a regime that would commit such an act without imposing sanctions eliminates any moral authority one has. This is the argument Florida Senator Marco Rubio just made on Meet the Press this morning. And it makes sense. As a result, Rubio predicts that, irrespective of what President Trump does, Congress almost certainly will impose sanctions on Saudi Arabia, unless it can show it did not murder Khashoggi.

But the Saudis are saying this:

“The Kingdom affirms its total rejection of any threats and attempts to undermine it, whether by threatening to impose economic sanctions, using political pressures, or repeating false accusations…” the official Saudi Press Agency (SPA) quoted an unnamed government source as saying.

“The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom’s economy has an influential and vital role in the global economy,” the source added, without elaborating.

If we are to hold the Saudis to their word – and this case I think we should – then a black swan event, with oil prices doubling or tripling overnight, could take place.

And the world would look very different afterwards. This is a serious foreign policy crisis.

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