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The Dark Side of Globalization: How You Pay the Price

We all enjoy many benefits of globalization – world-spanning supply chains, and an abundance of inexpensive manufactured goods. Unfortunately, the dark side of globalization is that regional conflicts can cause economic havoc on the other side of the world. Here’s what happened last time…

The Dark Side of Globalization: How You Pay the Price
Photo by EuStock
Photo by EuStock

From Peter Reagan at Birch Gold Group

Summary

  • The current war in the Middle East has global economic repercussions
  • History has examples of the worrisome impacts of similar oil price shocks

Globalization is an economic miracle made possible by our technological achievements. Information, trade and capital circulate worldwide every second of every day. It’s easy to take this for granted!

Stop for just a moment and reflect on the sheer number of miners, manufacturers and shipping companies that contributed to a single finished product – say the iPhone in your pocket. Each iPhone contains 60 different elements, from antimony to zinc. A total of 43 countries on all six populated continents provide raw materials and finished subcomponents, each of which has to be transported from its origin to its destination.

Why am I going on about this? Because, for all the incredible benefits and wealth globalization has brought us, it also means unexpected events on the other side of the world can rattle the foundations of your financial stability.

After experiencing the highest national gas prices in U.S. history during the Bidenomic inflationary heat-up in June last year, where average prices topped $5 a gallon, we could use a break from what seems like an endless conveyor belt of economic turmoil. The COVID panic, the Fed’s mishandling of the crisis, then the ongoing conflict in Ukraine… A lot keeps happening.

Thanks to globalization, all of it affects you.

What happens over there doesn’t stay over there

Which leads us to the most recent flashpoint. The surprise attack on Israel and the war now raging in the Middle East has taken yet another dark turn, according to Reuters:

Yemen's Houthis have waded into the Israel-Hamas war raging more than 1,000 miles from their seat of power in Sanaa, declaring on Tuesday they had fired drones and missiles at Israel in attacks that highlight the regional risks of the conflict.

Part of an "Axis of Resistance" backed by Iran, the Houthis have rallied behind the Palestinians since Hamas attacked Israel on Oct. 7, opening a new front for a movement that has waged war for eight years with a Saudi-led coalition in the Gulf.

Houthi military spokesperson Yahya Saree said in a televised statement the group had launched a "large number" of ballistic missiles and drones towards Israel, and there would be more such attacks to come "to help the Palestinians to victory."

His statement confirmed the widening scope of a conflict that has unnerved states including the world's biggest oil exporter Saudi Arabia, hardening fears of spillover as Israel seeks to destroy Hamas in its Gaza Strip stronghold.

I think we can agree that this war is tragic. Like any war, it’s extremely complex, with a great deal of history and regional politics at play. I don’t want to ignore these factors – instead, I want to focus on the economic and financial consequences we can expect here in the United States.

When a terrorist group attacks a sovereign nation, that’s one thing.

When a terrorist group armed and supported by several sovereign nations attacks another nation, that’s a war. And wars are economically devastating for more than just those pulling triggers.

For example, the World Bank reports that crude oil prices will likely skyrocket in the near-term, meaning higher gas prices for everyone:

In a “large disruption” scenario — comparable to the Arab oil embargo of 1973 — the global oil supply would shrink by 6 million to 8 million barrels per day and prices could go up by 56% to 75%, or $140 to $157 a barrel, according to the report. Indermit Gill, the World Bank’s chief economist, said Russia's invasion of Ukraine has already had disruptive effects on the global economy “that persist to this day.”

"If the conflict were to escalate, the global economy would face a dual energy shock for the first time in decades — not just from the war in Ukraine but also from the Middle East,” Gill said."

Making matters worse, Russia also created a supply bottleneck:

…Saudi Arabia and Russia constrained supply by extending production cuts to the end of the year.

But Moscow's announcement last week, temporarily banning gasoline and diesel exports to most countries, has had a strong effect on market expectations. A growing number of analysts think oil could hit $100 a barrel, for the first time in 13 months.

Now, we’ve seen crude oil prices over $100/barrel, but not very often – just five times in the last 80 years (see chart below, source):

80-year history of crude oil prices

70-year history of crude oil prices via MacroTrends, with red line indicating $100.

Crude oil prices are incredibly important to the global economy.

Think about it: Fossil fuels supply 84% of the world’s energy. Crude oil is 40% of the world’s energy, and the majority gets refined into the aviation fuel, diesel and gasoline required for transportation.

Ultimately, when oil prices surge, so does everything else! Farmers paying more to fuel their tractors and harvesters? Food prices rise.

Since virtually every plastic is made from petroleum, prices on manufactured goods rise.

And, of course, since every finished product must be shipped from factory to warehouse, prices on everything rise…

With this in mind, it shouldn’t surprise you that economic turmoil has historically followed massive surges in oil price…

History’s “Oil Shocks” show us just how bad the next one might be

One of the most famous oil price shocks started in 1973. Known as the Arab Oil Embargo, it started a chain of events that resulted in both the first time oil prices hit $50 a barrel and the first time oil topped $100 per barrel.

Here’s a summary, via the Federal Reserve History website:

On October 19, 1973, immediately following President Nixon’s request for Congress to make available $2.2 billion in emergency aid to Israel for the conflict known as the Yom Kippur War, the Organization of Arab Petroleum Exporting Countries (OAPEC) instituted an oil embargo on the United States (Reich 1995). The embargo ceased U.S. oil imports from participating OPEC nations, and began a series of production cuts that altered the world price of oil. These cuts nearly quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974. In March 1974, amid disagreements within OAPEC on how long to continue the punishment, the embargo was officially lifted. The higher oil prices, on the other hand, remained.

In a nutshell, then: The U.S. sent aid to Israel which had been surprise-attacked by a coalition of Arab nations led by Egypt and Syria.

In retaliation, those nations stopped selling oil to the U.S.

Oil prices quadrupled, and the resulting shock created not one but two major recessions. And major price surges not only at the gas station but on all transportation, from aviation to the U.S. Postal Service. The inflation lasted well into the 1980s, and savaged the purchasing power of the U.S. dollar permanently.

Note: You may not think $11.65/barrel crude oil is a big deal. Adjusted for inflation, that $11.65 would be about $80 in today’s dollars. Remember, though, an “oil shock” isn’t just about price – it’s about the rapid surge in price. Think about your personal financial situation. How many of your bills could quadruple overnight without causing major economic stress? If my phone bill went up that much, I’d cancel my service in a heartbeat. If my mortgage went up that much, though, I’d be in real trouble…

If one oil price shock wasn’t enough, another major one took place during the 2008 financial crisis, and resulted in oil rising over $100 per barrel for four years:

In February 2008 Venezuela cut off oil sales to ExxonMobil during a legal battle over nationalization of the company’s properties there. Production from Iraqi oil fields, of course, had still not recovered from wartime damage, and in late March saboteurs blew up the two main oil export pipelines in the south—cutting about 300,000 barrels per day from Iraqi exports. On April 25, Nigerian union workers went on strike, causing ExxonMobil to shut in production of 780,000 barrels per day from three fields. Two days later, on April 27, Scottish oil workers walked off the job, leading to closure of the North Forties pipeline that carries about half of the United Kingdom’s North Sea oil production. As of May 1, about 1.36 million barrels per day of Nigerian production was shut in due to a combination of militant attacks on oil facilities, sabotage, and labor strife.

While we were distracted by the Federal Reserve’s bailouts of banks, the global energy market was going bananas. Regardless of who was ultimately responsible, there is no doubt that crude oil prices rose to historic levels during (and after) the 2008 financial crisis.

So this leaves us with the more important question: What can we expect in the months ahead?

The answer is: It depends on how the various geopolitical tensions work themselves out. The more parties who involve themselves, the more the conflict spreads, the greater an economic impact it will have.

Even if you don’t follow the news about what’s happening over there, I hope I’ve explained to you why it matters over here.

So what can we do about it?

Bracing yourself for “retirement shock”

Enduring the next oil price shock (or any unexpected economic development) boils down to this tactic: diversify your assets for safety as well as growth.

That means during troubled times like these it might be best to consider historic safe haven assets that offer wealth protection.

Physical precious metals like gold and silver historically acted as safe havens during both of the oil price shocks and the economic catastrophes of the 1970s and the 2008 financial crisis.

Gold especially has historically outperformed inflation, and is more liquid might think (which can be helpful if geopolitical tensions escalate even further).

Don’t wait, take back control of your financial future, and get all the information you

need to consider precious metals in our free kit.

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