War Cycles And Oil  

For those of a bearish economic disposition, here's an interview with "Dr Doom" Marc Faber. He notes the surprising lack of volatility in the overall markets given the energy situation and the emerging possibilities for conflict.

I would say, first of all, if you impoverish a society through inflation, they take extraordinary measures, and they fall prey to dictators, basically, – I'd just like to point out that Hitler was democratically elected; a lot of villains of this world were democratically elected – and so the country becomes more belligerent.

But where I would be very concerned is... we economists, we have business cycle theories and there are numerous theories but some are more accepted than others. Historians, they have war cycle theories because war occurs in certain cycles. There are peace grown generations and war torn generations and so forth; and if you are born in a war torn generation you are less likely to start a new war if you've really seen the horrors of war, whereas if you've never seen war, at some point you become more belligerent. And one of the war cycle theories say that when commodity shortages occur, then prices go up. Then obviously some countries become concerned about securing the supplies of resources.

And all I can say is the demand for oil in Asia will double from 21 million barrels to 40 million barrels in say 10-12 years, because we start from a very low per capita consumption level. And on the supply side we have, today, a supply of around 84 million barrels/day. We don't know how much more oil can be produced. There are lots of people and studies that would point out that, actually, oil production will begin to diminish. My impression is that: the world will go to World War Three one day over oil, because China needs oil, the US needs oil, Japan needs oil, every country needs oil, including also India; and that these rising commodity prices will lead in the next few years to a rise in geopolitical tensions.

And nobody can tell me there are fewer geopolitical tensions today than there were during the Cold War. In fact, the Cold War was a beautiful equilibrium because no dared to really do anything, and now the Cold War is over, and a lot of countries are up for grabs: the US is establishing bases in the Middle East, Central Asia; the Chinese also want to expand into Central Asia, because if you look at the map, China borders Kazakhstan, Tajikistan, Kirgizstan, and that border is several thousand miles long; and the Russians also have strategic interests in Central Asia.

I think that if I look at the financial markets today – and the low volatility we have – and then I look at the rising geopolitical tensions, I'm surprised by the low volatility and the complacency that exists concerning financial assets, because I think at any time something could really start to go bad.