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Tags: energy | crisis | global | economy

Are We on the Brink of an Energy Crisis?

By    |   Wednesday, 30 July 2014 07:19 AM

The pendulum continues endlessly. Stocks are up one day, down the next. While the grind continually plays out, the momentum is for stocks to go up because of the incredible liquidity sloshing around in the markets.

The geopolitical environment is heating up ever more.

The United States and European Union have imposed further sanctions on Russia. “This time it will hurt” is the promise we hear. These new sanctions hurt the financial and natural gas sectors. The U.S. banking system is able to strangle the funds flowing to Russia for gas as it is a commodity that is traded in dollars and as such all trades have to clear through a U.S. bank.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000

The United States is also freezing funds of Russian banks held in New York. This is yet another benefit of being the global reserve currency. Next time the U.S. government writes policy to debase the dollar, it better remember this strategic advantage.

Yet the global markets are completely ignoring the events as if nothing is happening.

As we push Russia into a corner, it is likely to retaliate. Given the largest trump card that Russia has is energy, we could see an explosion of an energy crisis globally, an event the global economic recovery can't afford.

The globe has seen such events so many times in the past that we have become desensitized to such massive global upheavals and stocks keep rising.

Yet I cannot help but worry if we will see an energy shock. This is a shock that the global economy can't afford because it is quite frail and needs constant support and monitoring.

Let us imagine one scenario: Russia begins to feel the pressure of the new sanctions. Its U.S. dollar accounts are frozen in New York. The EU also begins to flex its muscle. Russia shuts off all natural gas to Europe, which it can do in literally hours. So there is a significant gas shortage in Europe. Factories in Germany and France shut down within a couple of weeks. Countries like Italy and Spain go into a tailspin within the month.

Russia, which has signed a bilateral currency trade agreement with China, begins to supply natural gas to China and receives its payments in renminbi. The renminbi is now easily traded in London, Luxembourg and Hong Kong. Russia starts buying its needs in euros and Australian dollars when it exchanges its renminbi to other hard currencies.

The sanctions either fail or the United States and EU are forced to beg China to become the King maker and take their side. China will be sitting back, rubbing its hands in glee, watching all these chess pieces fall into place.

The isolationist policies that the United States has imposed on Russia since the collapse of the Berlin Wall are now coming home to roost.

I'd play the short term markets by buying some natural gas stocks. For the longer term, I would buy Chinese renminbi.

Have you diversified your portfolio yet?

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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The global economy can't afford an energy crisis at this juncture where it is quite frail and needs constant support and monitoring.
energy, crisis, global, economy
Wednesday, 30 July 2014 07:19 AM
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