The earlier hurricane which decimated New Orleans and much of its surrounding crude recovery infrastructure was bad enough.
However, if hurricane Rita hits Galveston, the cause-effect chain goes into high gear!
Galveston is the largest single cluster of US refining capacity, at circa +20% of total US refined crude consumption. Worse, it is the largest hub for oil discharge and storage in the USA.
Economic commentators such as myself, have been warning for some considerable time, that the fragile economic balance between over-consumption and an expanding money supply, plus the reality that the once mighty greenback is in reality a fiat or notional currency, could be upset, terminally, by any cataclysmic event or series of events, outside the control of Mr Greenspan.
Well, brace yourselves!
Rita may well be that single final event, that creates economic meltdown and triggers the long-feared domino effect.
One of the root causes of increasing product prices (product in this sense meaning refined crude oil products), is that whilst crude production has and can be expanded by extra lifting (flow), global demand now exceeds total world refining capacity.
Most major buyers of product, contract on term basis for their supplies: just as oil companies contract with crude producers, normally on what are called 6x6x5 contracts. These run for five years, with price breaks each six months.
Therefore, if Rita hits Galveston and knocks out 20% of US refining and storage capacity, or even partially reduces it, there is nowhere in the world for the US to turn to replace this loss, since other major refiners are already committed to extant contracts.
Since the US economy is grossly over-dependant on oil and product, it will stall.
Thereafter, the much ignored realities will come into play.
As the economy melts down, holders of US treasuries and bank deposits will attempt to rapidly liquidate their holdings: in other words, their would be a “Run” on the bank of the USA, being the Fed. The Japanese and Chinese (the major external holders of Federal paper) would rush to dump US dollars and buy other more stable currencies.
All that the Fed could do, is to pump liquidity into the system, or if you like, print more dollars bills, thus neatly devaluing the US $ even further!
Since banks lend to banks on name, rather than against securities, the lenders would refuse to roll-over their short term lending. Again, more pressure on liquidity.
Derivative contracts (which I have written about before in these columns) would be exercised in the worst-case scenario of their downside conditions. More pressure.
The inescapable conclusion, is that Rita, may well be the final event, that tumbles the US currency, back to reality.
The ultimate domino effect, feared for so long, would happen, when everyone within the financial system demands what they are really owed – now! No one can pay and as bank crash follows bank crash, momentum builds up to emulate Rita and becomes an unstoppable fiscal force, that drags the globe’s financial system, back to reality.
Hold on to your hats!
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