Monday 21 December 2015

Are lower oil prices necessarily good?

With 10 days left to spare of 2015 the price of oil refuses to plug the plunge as pessimistic news continues to add fuel to the flames firing up the worst case of bearish sentiment in the commodity that has been seen in decades let alone the Financial Crisis. Analysts have been left red faced the entire year as they've had to constantly revise their forecasts downward, coming in line with a more realistic yet abrupt production decision from rivals on both sides of the Atlantic.

The aggressor has been seen as Saudi, the lead producer of OPEC, who has unleashed an attack of mammoth proportions in terms of oil quantities reaching the market which has not only assisted the negative views in the sector but has seen storage facilitates and tankers scrambling to find short term solutions to avoid stored out inventory facilities with the prospects of turning suppliers away.

Yet it was the US shale producers that have added the latest woes to price with Baker Hughes reporting that the number of rigs that had been added to the existing ones already in operations registered the biggest increase since July of this year notwithstanding a decision by US lawmakers to lift a 40 year ban on the export of crude oil on Friday opening up the possibilities of further gluts being seen in the global oil market.

 Lower prices of oil have left monetary policymakers in developed economies suffering from chronic deflation in fear that these price wars could undo the years of work to stabilize demand with relaxed monetary policies with many including the ECB and BOJ opting to ease up further in the hopes that stimulus could revive demand.

But we starting to find the more reliance authorities place on monetary officials to guide economies the more prominent structural economic problems begin to show themselves in an era that has seen government's transition their nations theme from prosperity through production and employment to a social security reliance that encourages citizens to find any excuse not to produce value in the economy at the expense of those who are willing and able to do so.

We've seen the former class shrinking and the latter growing at a rapid rate in relation to one another creating a large disconnect to how these so-called equality gap fillers can be funded, but I digress.

Lower oil prices don't help these economies as they merely encourage monetary authorities to continuing printing money to fuel demand, the dilemma being the problem never goes away because money will always find a way to achieve returns by placing it in asset classes that eventually become over inflated over time as we have seen worldwide instead of finding its way into the pockets of consumers that are the necessary elements in starting economic activity.

We cannot expect to find demand from these economies as the wave of free money simply throws a veil over existing problems and judging by the urgency of finding political resolution regarding economic catastrophes eg Greece, it doesn't appear as if we'll see any proper thought into dealing with these issues anytime soon.

In the developing world, these economies have been hurt the most due to the slump in most commodity prices so oil falling out of bed would most definitely find its way into the troubling analysis currently being told in assessing the damage done following the rout. If we think of some of the casualties Nigeria, Venezuela, Angola and Brazil are the first that come to mind when thinking of their dependence to oil revenues in their respective trade balances to offset huge outflows from imports.

Nigeria has seen a dramatic reduction in its foreign reserves that it has been forced to allow the free flow of exchange to occur with a process whereby the central bank places foreign currency requests to be placed on hold until it becomes available. Venezuela is currently grappling with inflation of 150% because the downward spiral of oil prices means they do not make enough from the revenue to cover for basic necessities such as food. Added to this the political scene that's been unfolding as a result of this and you have a recipe for disaster.

These two countries aren't the only ones suffering tremendously but you do get a sense of panic that hangs in the air when it comes to judging the strength of these economies. Consumers have been left with little to no change in the price of fuel as the negative sentiment has remained rife within the emerging market currency market that has drastically depreciated local currencies to the extent that any drop in the price of oil is cancelled immediately by the devaluation of the currency.  

It seems the only benefactors of the lower oil prices has been the US but lacklustre economic growth doesn't suggest that the trend of higher prices will be seen anytime soon. If we are to see that we need to see simultaneous global growth with a good handful of sustainability added to the mix and right now nations around the world couldn't be more further than what we've seen before.

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1 comment :

  1. Anonymous21 December 2015 at 12:17

    While it might seem as if South Africa hasn't benefited from the lower oil due to Rand weakness, in reality if oil prices had remained at $100 a barrel we would paying around R17/litre. Also the Rand would likely be weaker due the higher cost of imported oil and its impact on our balance of payments. I think we've saved more R60 billion this year on our imported oil bill.

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