Peak Oil: We are no longer finding enough oil to keep pace with the estimated demand outlook. In addition, the new oil discoveries are, for the most part, in much harder places to extract like deep oceans and oil sands. Natural gas could probably solve many of the world’s energy problems, but governments seem reluctant to invest in it. As the developing world’s economies gain momentum so to does their oil consumption. China’s middle class is also growing and increasing their consumption. Aside from inflation, these are a few of the main reasons oil is skyrocketing during such a poor economic environment. Price increases for energy will continue to add further weight onto an already burdened world economy.
Probability: A certainty if our dependence on oil is not broken in the very near term. Outlook: 1-2 years
Further price pressures on oil can come from:
Israel or the US Attacks Iran: As Iran progresses its nuclear program, Israel is becoming increasingly nervous and has used its extremely powerful lobby group, AIPAC, to encourage the US to implement further sanctions against Iran. The Obama administration recently tried to trump up outrageous charges of an Iranian backed assassination on a Saudi official, which was reminiscent of Bush’s WMD’s. The International Atomic Energy Agency recently reported that it had credible evidence of Tehran’s nuclear weapons program. According to the Financial Times, a new report predicts that oil could hit $175-$200 a barrel if Israel attacks Iran’s nuclear facilities.
Probability: 10-20% chance Israel attacks Iran’s nuclear facilities in the next 3 years (much will depend on Iran’s nuclear program)
Civil War in Iraq or Libya: A break down in either of these countries will be responsible for at least a $10 increase in oil. In addition, a toppling of either of these regimes would most likely end up as a well-funded breeding ground for terrorists, and also cause instability in the region.
Probability: 50% chance at least one of these countries enters a civil war in the next 3 years. In Iraq’s case, much is dependent on future US involvement.
Saudi Royals Fall: The Royal Family have been facing increasing resistance from the people. Some might consider this resentment justified as the royals have sucked hundreds of billions of dollars out of a relatively poor country. If there is an uprising, the Royals will most likely leave with much of the wealth, while fundamentalists take over major oil reserves. This would increase pressure on Iraq and other newly liberated countries and provide even more funds to support Islamic terrorists.
Probability: 10% chance in 5 years. The Royal family has a lot of opposition, but they have also invested heavily in sophisticated military technology and have the support of the US. The Royals have been somewhat unpopular for years, and not seen a revolt as of yet, but they are implementing some fairly dramatic reforms that face a backlash from conservatives.
China Stops Buying US debt: China has been diversifying into gold, Euros, and other assets for a while now in order to reduce exposure to the US. China has also diversified trading by shipping more goods to Europe and other Asian countries. At some point, China may see a greater advantage to sink the US than to keep it afloat. After all, China has been making long-term deals for its oil with African countries, and Middle East and refraining from making enemies. In addition, China has massive reserves to weather a financial storm and also has a growing consumer market for its own goods, which could replace some of the US demand.
Probability: 30% chance in 3 years. Dependent on US foreign policy. If America continues to cry about currency manipulation and unfair trade, there may be a backlash.
European Countries Default: Almost every country in the EU has an unsustainable debt load and a large deficit. The minute that one nation defaults on its debt, not only will the debt holders face catastrophic losses, in many cases European banks that will go bankrupt, but it will also make investors see other government bonds as riskier assets. This will increase these governments’ borrowing costs and make it more likely they will default, which will make investors ask for higher interest rates, which will make it more likely they will default and so on. This cycle is already taking place in Italy and Spain as investors are wary of their debts due to the Greek default. In fact, many economists have stated that Italy’s will face a certain default if their ten year bond yields cross 7%. On November 9, 2011 the bonds crossed that threshold for the first time. European countries are living well beyond their means as a result of socialist programs like universal health care. Reigning in this spending through austerity measures have proven to be untenable as European citizens have become dependent on government benefits and even see them as human rights. Minor cuts to pensions and government programs have been met with mass protests and riots in Greece and England. In addition, European unemployment is above 10% in many European countries with Spain seeing unemployment figures over 20% and Greece above 16%.
Probability: 90% chance at least two European countries default in 3 years. Greece is already in a state of default and Italy will be soon. Next on the chopping block will be Portugal, Ireland, or Spain.
Health Care Costs Break Western Economies: Almost every Western economy has universal health care or some form of government health subsidies like Medicare and Medicaid. As populations get older and fatter, the health care costs increase, and with fewer younger people to support the older patients (many European countries’ populations are stagnant) these costs become untenable. This process has already caused astronomical debts in nations around the world. The United States, for example, has over 100 trillion dollars in unfunded health related entitlement programs. It is estimated that health care costs will rise to 25% of America’s GDP by 2025 and 37% by 2050.
Probability: 90% chance at least three major Western nations either default on current debt loads, or suspend government health care programs within 5 years.
High Worldwide Inflation: In order to pay for massive national debts and provide socialist benefits to the people, governments are going to have to print money, which will send the prices of goods skyrocketing. This is in part why commodities have doubled in price in the last few years. As I prove on my youtube video: Is a Debt Default in America Inevitable? there is no possibility that America will be able to service its debt without printing massive sums of money, which will devalue the currency. Many European countries are in similar states. The people won’t accept the austerity measures that will be needed to pay off these massive debts, and even if they did it would be highly questionable whether their economies will grow enough service their debts as austerity measures generally have a negative economic impact. After all, people aren’t spending money on T.V.’s when their retirements are being slashed. Printing is usually the least painful option, at least at first, so it is the most favored by governments. Current inflation numbers, which famous investors such as Jim Rogers have called a “sham,” should not fool people. Current inflation numbers have discounted price increases in energy and food, which many economists have noted as being ridiculous. High inflation destroys the middle-class as they have to use their disposable income to pay for gasoline, housing, and food, rather than save or invest it.
Probability: 95% chance inflation levels exceed normal worldwide levels over the next 5 years. In fact, the massive increase in commodity prices and money supplies signals that this has already happened.
Food Shortages: The population is growing astronomically and is estimated to reach more than 10 billion by 2050. These new mouths will need more food sources at a time when global climate change is putting pressure on current food sources. Earth’s arable land is changing and melting mountain glaciers, which used to provide water to irrigate crops are melting. The combination of heat withering existing crops, China’s growing middle class consuming greater quantities of food, high oil prices, and an inflationary environment are all contributing to shortages and rising food prices. Countries like India and Russia have restricted exports on food in the past, and any shortages could cause further restrictions. As the UN has warned, one bad season for crops could result in mass starvation and instability in the third world.
Probability: 25% chance of at least one major food price shock in the next 5 years.
Over-Fishing: Time magazine estimated that ocean seafood will be virtually extinct in 50 years if we continue our rate of overfishing. This could add further pressure on food shortages and also hurt economies reliant on commercial fishing, like Iceland.
Probability: 40% chance that enough seafood depletion will occur in the next 10 years to hurt fishing economies and put a strain on global food supplies.
Water Shortages: The world’s water consumption quadrupled from 1900 to 2000. The United Nations estimates that over 1 billion people now lack access to clean drinking water.
By 2025, it is estimated that 1.8 billion people will live in areas of absolute water scarcity. Population growth will put added pressure on available fresh-water supplies. More people means more food, and irrigating crops in dry countries already accounts for 70 percent of the world’s fresh water consumption every year. There will be a day when wars will no longer be fought for oil or gold but for water. And that day is not far away. Many countries share reservoirs and rivers. As their populations and water consumption increase, conflicts will arise when countries take greater amounts of shared underground reservoirs and rivers to supply their people. Locally and regionally, competition for water is already increasing. Turkey and Egypt have already started dam and irrigation projects that reduce the water supply of their neighbors. In 2002, the United States announced that it was considering suspending water supplies from Colorado to Mexico via the Rio Grande because Mexico was using more water than was allocated to it according to a 1944 treaty. China is building several dams that will divert half of the flow of the Mekong River from Vietnam. Israel pumps four times more water out of shared rivers than its neighbors, Jordan, Syria, and Lebanon.
Probability: 10% chance of a military conflict over water in the next 5 years. 25% chance of strained global relations and problematic water shortages in the next 5 years.
Occupy Wall Street Grows and Turns Violent: Occupying a square or street is bad for local businesses. In addition, further redistribution of wealth is not what the United States or any socialist country needs right now. Socialistic programs are responsible for the vast government debts the world is facing right now. While these protestors may have some legitimate problems with the bailouts of big banks, the solutions they put forth will further harm their situation.
Probability: 25% chance the OWS movement causes further political turmoil and economic despair.
Unemployment Increases: The real unemployment number is probably close to 20%, as people who gave up looking for work are no longer counted. There are also great deals of underemployed people in America and in struggling European nations. Many companies used the economic crisis as a reason to cut expendable jobs that technology has made redundant. Those jobs aren’t coming back. Companies are also moving out of Western countries because of strict labor laws and high taxes, which make them uncompetitive. As unemployment benefits run out there will be more and more public outrage. Government funds are already running low and this will probably spell more cuts to these type of safety net programs. In addition, many young college graduates have deferred entering into the workforce and have sought out higher degrees, which will saddle them with large debt loads and few job prospects. Even if the economy were to see growth, the competition for jobs will be fierce for at least 5 years.
Probability: 25% chance the real unemployment number breaks 20% in the next 5 years.
Mexico Fails as a State: One of the main sources of Mexican government revenue is oil exports, but Mexico will be importing more oil than they export soon. Political instability with drug lords has wreaked havoc on tourism and foreign investment, which adds a further burden to an already weak economy. If Mexico falls, political instability in the region will be chaotic and the US will see an increase in illegal immigration.
Probability: 5% within 10 years.
Commercial Real Estate Bubble: Banks have been hiding commercial real estate risks on their balance sheets by overvaluing their assets. According to the Congressional Oversight Panel between 2010 and 2014 about $1.4 trillion of commercial real estate loans will reach maturity, with about 50% being underwater at the moment. Increased vacancies and falling rents have added further pressure to this market. A wave of defaults could result in further pressure on the unemployment rate.
Probability: 50% chance of significant defaults within 5 years.
Fannie May and Freddie Mac Cost Trillions: We are still somewhat unaware of what the real cost of the Fannie May and Freddie Mac bailouts will be, but it could amount to trillions. The US real estate market was essentially one of the greatest bubbles in history, and the government’s encouragement of people to get into homes was largely to blame. With the US government cushioning the blow, it could be an unbearably large number and put further pressure on the national deficit.
Probability: 50% chance the bailouts cost at least 1 trillion.
Stock Market Crashes: With so many pressures on the global economy it is hard to believe that companies will thrive in an environment where governments around the world are cutting budgets. After all, governments have become major employers for Western countries. In addition, companies are historically valued at 12 to 15 times earnings, which is reminiscent of a ponzi scheme. Think about it this way, would you buy a McDonalds today if you would get your money back (with no profit) in 12 years?
Probability: 45% chance the market crosses below the lows in 2009.
Major Terrorist Attack: Around every ten years there seems to be a major terrorist attack in the US, and September 11, 2001 was just over ten years ago. It is highly unlikely that with increasing antagonism due to the Iraq and Afghanistan wars and higher levels of recruitment and funding that terrorists have been completely stymied by the US government. Terrorists have most likely been coming into the US through Mexico and Canada. Some of the scarier scenarios include biological or nuclear weapons. Either of which would case mass panic and most likely sink the stock market.
Probability: 30% chance of a significant terrorist attack in the next 5 years.