After the last week, the world is a more unstable place. On the one hand, Israel is busy bombing Lebanon back to the 1980s, raising fears it might trigger a wider Middle East war. On the other hand, the leaders of the world’s most powerful nations preened themselves for a few days together at a palace in St. Petersburg at the G8 summit, yet were unable to agree to do anything to stop the carnage. People will have their own theories about how we reached this pass. Many will point to the catastrophe of the US occupation of Iraq and the growing difficulties in Afghanistan as evidence that the West has lost its nerve and its legitimacy to intervene effectively in the Middle East. But one shouldn’t overlook the role of the high price of oil in enriching and emboldening countries outside the global empire of free trade.
Would Iran be so confidently cocking a snook at the West – funding terrorists and threatening to build a nuclear bomb – if oil was still $20 a barrel as it was five years ago, rather than nearly $80 now? Would Russia be so willing to stand up to America if petrodollars weren’t flowing into the Kremlin? The Iraq debacle may have sapped America and its allies, but high oil prices have strengthened its opponents. Look at the plaudits for Putin at the G8. “The Russian president displayed all the confidence that comes with 70%-plus approval ratings and an economy growing at more than 6% a year,” noted the FT.
Clearly, high oil prices look likely to stay for a while. That means oil-producing countries are going to continue to get richer and more confident – which could mean more instability. Should investors be worried? Not necessarily. In strict economic terms, any instability is likely to be limited to parts of the world that don’t contribute a huge amount to the global economy. These are border wars on the periphery of the global empire of free trade. For the markets, such skirmishes are in the price. Meanwhile, in New York, London, Paris and Tokyo, it’s business as usual.
Instead, the greater risk to investors comes from the other side of the equation. It’s not the price the West has to pay for oil, but what oil-producing countries do with the money. The reason the global economy took the fourfold increase in oil prices in its stride was that money was cheap. Importers could borrow the money to pay for it. Where from? In part, from the oil producers themselves. As the petrodollars piled up in central banks, three quarters of them were used to buy foreign assets, primarily US government bonds. That helped keep interest rates low, the dollar high and cushioned the impact of high oil prices.
But will oil producers continue to invest their windfalls in the US, or will they start to spend the money at home? They appear to be doing the latter. In the Gulf, there has been a domestic investment boom and a stockmarket bubble, while spending on household goods and capital equipment is soaring. If that means there is less cash to finance US trade and budget deficits, then the dollar will fall, US interest rates will have to rise and the global economy will get a nasty shock. From an economic perspective, the real source of instability in the world isn’t the West’s dependency on foreign oil, so much as America’s reliance on foreign money.
The online gambling industry and the law
Well, no one can say they weren’t warned. The PartyGaming prospectus states quite clearly that: “the US Department of Justice considers that companies offering online gaming to US residents are in violation of existing US federal laws, including the Wire Act, the Illegal Gambling Business Act, the Paraphernalia Act and the Travel Act… Any action by US authorities that succeeds in prohibiting or materially restricting PartyGaming from offering online gaming in the US could result in investors losing all, or a very substantial part, of their investment”.
Okay, so PartyGaming is not yet in the frame with the US authorities. At the moment, it’s only David Carruthers, the chief executive of BetonSports, who has been arrested on a 27-page list of charges including racketeering, tax evasion and fraud. Indeed, PartyGaming’s share price has fallen less than some other online gaming groups on hopes that the US authorities will only go after sports betting sites, such as Sportingbet.com, rather than online casinos, which are less obviously prohibited under US law.
Don’t believe it. The online gaming industry is always bamboozling investors with excuses as to why the law doesn’t apply to them: it’s a grey area; it doesn’t apply to games of skill like poker; no one’s been convicted yet. But if you look at what they do rather than what they say, you get a different picture. PartyGaming has had an exodus of top staff, including a chief executive who walked away from £30m. The founders have been dumping shares as fast as they can. And even if the online casino groups do miraculously avoid prosecution, it’s hard to see how they will be able to retain staff now – not with their options under water and facing the threat of extradition.
Simon Nixon is executive editor of Breakingnews.com
Recommended further reading:
For more on Middle East unrest, read: What Lebanon means for the world economy. And find out what James Ferguson thinks is the real reason for the oil price rise and how you can profit from the energy crisis.