MacroScope

When it comes to predicting a dark future, Nouriel Roubini – the NYU economist who earned the moniker Dr. Doom after he correctly predicted the financial crisis – is not about to let anyone get in his way.

Even if it’s his host. And even, or maybe especially, when there are 500 witnesses.

That’s precisely what happened Wednesday morning, when Michael Milken – the former junk-bond king – shared the stage with Roubini at Milken’s Global Conference. What was billed as an interview in one of the Beverly Hilton’s grand ballrooms had the feel of a pitched battle.

Roubini warned of a massive oil shock following a potential clash between Iran and Israel – or possibly the United States, sometime after the November presidential elections.  He talked about geopolitical instability in the Middle East. “It’s a mess,” he said.

Milken countered with a graph showing the U.S. has bigger fossil fuel reserves than any other country in the world, and suggested that natural gas, extracted from shale reserves that are largely outside the Middle East, will eventually make Arab clashes irrelevant to energy.

It’s easy to blame tensions with Iran for all of the recent spike in petroleum prices. But there are other catalysts for the market’s sudden surge. For one thing, U.S. economic data have been consistently surprising to the upside while the European situation appears loosely under control, both factors that suggest the global economy may yet coast along through 2012 without faltering.

Then there are the actual hits to supply taken due to geopolitical events around the world, says Marc Chandler at Brown Brothers Harriman, which in just two months have helped push Brent crude prices more than $20 higher to a 10-month high above $125 a barrel:

There has been a genuine supply shock. Between Sudan, Yemen and Syria, nearly 750k barrels per day (bpd) have been taken out of production due to political instability. On top of this Libyan oil output is about 600k bpd below pre-civil war levels.

Sovereign wealth funds, a $3 trillion industry managing windfall revenues for future generations, arguably need a set of benchmarks different from those used by other private investors as they are state-owned. Andrew Ang, an associate at U.S. National Bureau of Economics and a professor at Columbia Business School, proposes the following four benchmarks in a recent paper distributed to SWFs.

The Benchmark of Legitimacy. Whatever the source of wealth, the SWF exists to transfer the benefits of that wealth from the present to the future. Without this benchmark, the money in the SWF is at risk of being immediately depleted. A necessary condition to maintain legitimacy is to have well-developed legal institutions in place.

The Benchmark of Integrated Policy and Liabilities. A critical part of this benchmark is detailing how and under what conditions the money can be distributed from the fund. Clear, yet flexible, spending rules must be set to meet well-defined liabilities.

Little Diomede, a remote U.S. island in the Bering straits only 2.5 miles from Russia, has 129 people living in a traditional Ingalikmiut Eskimo village.

 On an island surrounded by rocky slopes and harsh storms with the sea frozen for half a year, employment is limited to the city and school whereas seasonal mining, construction and commercial fishing positions have been on the decline.

Little Diomede villagers are part of tens of thousands of qualified Alaskans who receive dividends from regional wealth fund Alaska Permanent Fund.

This week has seen a rush of key policymakers and business executives from Africa flocking to London. Apart from Sierra Leone, oil and gas executives have been discussing the outlook for Equatorial Guinea, a small central African state rich in oil.

Equatorial Guinea made a relatively rare foray into the global news earlier this month for a presidential pardon of  former British army officer Simon Mann, who was serving a 34-year prison sentence in the country for his role in a failed coup d’etat in 2004.

Gabriel Obiang Lima, vice minister of mines, industry and energy, was in London to talk about his ambition for the country. “Our aim is not to be the Kuwait of the region. It’s to be the Singapore of the region,” he told dozens of business executives in a conference in London on Wednesday.

Oil prices are more than double the December-February troughs and commodity prices generally are going up as the market cheers signs of an economic recovery.

Jeremy Grantham, chairman of U.S.-based money monager GMO, warns that the world is running out of resources in the long run yet is not correctly pricing the fact.

“We are simply running out of everything at a dangerous rate… As we move through our remarkable and irreplaceable hydrocarbon reserves, the price will, of course, rise remorselessly to ration supplies. We need, it seems, the shock of a Pearl Harbor to really gear up and make sacrifices,” he says.

This sounds awfully familiar. Oil prices have risen sharply from a March trough, while the U.S. dollar has fallen 10 percent against a basket of currencies. A bad 2008 flashback? Not quite.   

Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch, says oil merits close watching to make sure it does not rise too far, too fast. For now, it does not pose an imminent threat to U.S. or global economic recovery.

 ”Our economists around the world feel that as long as oil prices did not rise significantly above $80 per barrel, that would not prevent an economic recovery in the second half of the year,” he wrote in a note to clients. “A further rise in oil prices would act as a tax on importing nations, and we would worry in particular about the U.S. consumer.”