Will the World enter in to a global financial crisis like it did in 2008, due to another Oil upsurge?

Why is oil so important to the global economy? Has its importance gotten greater or lessened over time?

Undoubtedly, there has been huge progress in lessening the world’s dependence on oil as a commodity, from energy-saving innovations to the fracking revolutions. But the fact is that global demand for energy keeps on rising at a greater pace as the populations achieve higher standards of living. For example how many Chinese drove cars a decade ago? Now it’s the world’s biggest auto market.

In Libya the ongoing skirmishes between the government and rebel group have reduced the daily production of crude oil dramatically from 1.6 million bpd to an estimated below 200,000 bpd. In Iraq there has been an upsurge in conflicts between various militias which has interrupted production. In Nigeria, production has fallen due to leaks caused by the trouble makers. Moreover, Syria is in chaos and Egypt is still unstable.

The Oil price has a record of plunging the globe into recession. Kirk Spano, the founder of Bluemound Asset Management, assessed that the spiking oil prices in 1973, 1980, 1991, 2001 and 2007 contributed to a greater or lesser degree to the economic recessions of 1973-74, 1980-81, 1991-92, 2001-03 and 2007-08 that were painful for all equity investors. The global financial crisis of 2008 was no different with a sudden spike in oil prices to $147 a barrel that broke the back of several economies.

It’s a problem when a country like Japan which is technically advanced has to shut down its nuclear stations post the earthquake or when a country which does not fall in the fault line, Germany, has to do the same post the public vote on the matter. Oil is abundant, safe and easily consumed at a price.

Are we not sensing a déjà vu this summer?

Iraq plays an important role for market stability. With current production of 3.3 mbpd Iraq is the second largest producer in the OPEC cartel and it has the potential to become larger player. Current predictions by the International Energy Agency (IEA) show Iraqi production growing to 4.4mbpd in 2015 and to nearly 6mbpd by 2020.

An eventual decline in Iraqi exports would mount pressure on energy hungry economies of China and India to increase their imports of Iranian oil. Russian oil exports would become crucial for global markets, potentially further strengthening the former Soviet Union’s position in Ukraine. Finally, a major spike in oil prices would help regimes like Venezuela too. If Iraq falls, oil prices would shoot up breaking previous highs and spread unrest in the region.

Japan - The latest sick man of Asia?

The Japanese are going through an immense economic+political transformation with a collapse in the export sector in a much globalized version of recession and the more radical promises of the political parties such as increased spending on military and tougher stances on territorial disputes with neighbors which worries China.Till date, Japan's involvement in global politics, at least since the world war 2, has been only to the extent of summits which has helped Japan in promoting a soft image of itself as a global producer for many established brands. Such as portrayal did not only contribute to Japan's growth, but it benefited the entire region including China and the Koreas.

Shifts in paradigm can have some serious repercussions for  Japan and in fact it has started to face some.

Japan recorded a Government Budget deficit equal to 9.70 percent of the country's Gross Domestic Product in 2011. Historically, from 1960 until 2011, the Japanese government budget averaged -2.7% of GDP reaching an all time high in 1961 of 2.6% of GDP and an all time low of -10.5% of GDP in 2009.

The Japanese finance ministry reported a 549 billion yen trade deficit in Nov. 2012, higher than expected. The major cause of this decline is due to the territorial spat over islands between China and Japan which has in turn impacted the shipments to China, Japan's largest export market. The Chinese have initiated a strict boycott of Japanese products which has not only impacted Japanese exports to China but Japanese manufacturers who run facilities in China to meet consumer demands around the globe. 

A weak Japanese yen is not strenuous enough to make Japanese exports competitive in international markets as it is still higher than what it was five years ago, hurting exporters' profits. 

Who benefits? Using a macro lens, it's a lose-lose situation for all the stakeholders and it is just like adding fuel to fire (further exacerbating the economic crisis). Using the micro-lens, South Korea seems to be the winner in the short run. Its giants are improvising their products, both automobiles and electronics, and capturing market share in world markets. 

It can't be said that the Japanese are in a recession, unless officially announced. However, the facts and figures do not show a progressive image either.