The real data on the oil slump

There’s a growing hysteria about the slump in oil price and what it means. On the Australian stockmarket it has driven prices down a few hundred points and firmly ended the short-lived Santa rally.

This is quite understandable with giant listings like BHP-Billiton, Woodside and Santos being savaged by worried investors. One headline-grabbing analyst even proffered the opinion that at current prices Santos was worth nothing!

But the situation needs to be put into perspective. Yes this is going to hurt energy companies, curtail investment and increase unemployment both here and overseas. However I can’t believe a 50 per cent fall in the oil price isn’t going to help Europe’s recovery, stabilise China’s cost restructuring, and keep Americans spending.

Even here in Australia the petrol price fall is being compared to a 0.5 per cent cut in interest rates.

Where we will see real pain – both social and economic – is in those countries which are dependent on a high oil price for their country’s well-being. That means Russia, Venezuela, Mexico and Nigeria. The smaller Mid-East producers will also be forced to tighten their belts.

But everyone seems to be forgetting history, which does tend to repeat itself as soon as a generation has forgotten about the past. The oil price can be extremely volatile even when OPEC has the supply side under control. As an example the United States benchmark oil contract, West Texas Intermediate, fell by 69 per cent back in 1986, 58 per cent in 1990, 56 per cent in 2001 and 78 per cent in 2009.

The latest slump has been triggered by softening demand from countries like China and the Euro block, plus the United States becoming more self-reliant on the oil from the massive shale fields in the southern US states like Texas.

Whether the oversupply has been brought about by a slowdown in the world economy or by the fact that countries have responded to $US100 by using less of it is a story for another day.

The fact is Saudi Arabia could fix the problem by introducing cutbacks at the next OPEC meeting mid-year. Even if it doesn’t then no one expects the oversupply will last longer than a year and no one expects to see the price go back to where it was.

So it’s really good news for most economies, unless you’re an energy investor or the manager at the local petrol servo. The real worry is if one the oil-supplying countries collapses, the most likely being Russia. As one observer said the other day, if Greece can tilt the Euro zone what happens if Russia tanks?

Some of the social anecdotes and data are extremely worrying. According to the London Telegraph reported a week ago: “There is a de facto run on banks as depositors pull what they can from ATM machines, fearing the guillotine at any moment. Soviet queues are appearing again.”

President Putin in his annual address before the holiday break seemed to suggest this wouldn’t happen, but rather he would use monetary policy to fight the collapse of the rouble. Interest rates have been jacked up to 17 per cent.

“Crowds have descended on Ikea stores, converging in pick-up trucks to buy hard goods before it is too late. The company has now suspended sales of kitchens, saying it cannot meet demand.

“Those scrambling to buy cars may have missed their chance. Jaguar Land Rover has halted sales to Russia. So has General Motors, citing “rouble volatility,” according to the Telegraph

“As the buying frenzy subsides, the eerie stillness of depression may instead take hold. The central bank says the economy could contract by 4.7pc next year if oil prices settle at $60 a barrel, (they have since moved lower) but that was before the rate shock.

“BNP Paribas says each 100-basis point rise cuts 0.8pc off GDP a year later. Rates have risen 750 points in a week.   It was also before President Vladimir Putin disclosed his second line of defence. ‘We must squeeze rouble liquidity to stabilise the currency. We mustn’t waste our foreign exchange reserves thoughtlessly,’ he says. This means driving the MosPrime (Libor) rates to 30pc. Those borrowing to “short” the rouble are crushed, but so are Russian banks.”

All this at a time when the West is actively increasing financial sanctions on Russia in response to its military adventurism in the Ukraine. United States President Obama has told the Russians to abide by the previous ceasefire agreement and talks could recommence.

It seems Putin is caught is his own economic pincer movement. Only it’s the Russian people who are paying the price.

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