(photo credit: REUTERS)
The Western world has effectively closed for the year, devoting the last 10 days of the calendar year to social activities. Other parts of the world – comprising large chunks of the human race and an increasing share of the global economy – continue with business, more or less as usual. But even they are operating at half speed in the absence of the activity of the main financial centers.
Before leaving work, every analyst at every investment institution penned their thoughts on the outlook for 2015. Those who tried to complete their task early, as well as innumerable firms that conducted their internal discussions and formulated the business plans for next year well in advance, have not jumped the gun; rather, they have succeeded in shooting themselves in the foot. The reward for the excessive zeal will be having to do some or all of the work again.
That’s because whatever was said and written before December’s dramatic collapse in the prices of oil and natural gas is largely rendered inaccurate, if not useless, by that mega-development. The central feature of any assessment of 2015 is the need to trace the consequences of the oil-price crash, whether at the level of the individual firm, sector, national economy or at the global level.
The first element in any such assessment must be to establish the causes of the crash. Setting aside the conspiracy theories, the debate boils down to the relative weights of increased supply – primarily from the US, via the fracking revolution and its impact on oil and gas extraction – versus reduced supply, with China the key player on that side of the equation. This debate feeds into another, no less important, one: whether the price crash is a positive or negative development.
To a large degree, that depends on whether you are a producer or consumer of energy. Put simply, countries or regions for which energy production is a major part of their economy, exports or government revenues are going to suffer. Even then, the degree of pain will vary enormously, with Saudi Arabia, for example, able to weather the slump with much greater ease than, say, Iran – although that doesn’t mean there will be no fallout; on Thursday, Saudi announced pay cuts in the public sector.
The pain is by no means limited to OPEC members, or even to non-OPEC developing economies such as Russia, Kazakhstan and Mexico. The initial assumption among American commentators, that the price fall was the equivalent of a large tax reduction for households and firms alike, has now been tempered by the sobering realization that the great shale boom has been a key factor in the country’s economic growth these past few years – and that it has created, both directly and indirectly, a disproportionate share of the new jobs in the American economy.
There will be no such growth and jobs next year, that much is certain. Texas, in particular, as well as smaller energy-producing states will likely fall into recession.
Many firms in the energy patch, having overloaded on cheap debt, will go bust, causing losses to their investors and to the banks that lent them money. To what extent will the extra money in the pockets of the general population, saved at the gas pump and from lower fuel bills, offset these losses? The answer is that nobody knows – and it’s critical to understand why. The math is basically straightforward. In the context of the entire American economy, the winners far outnumber the losers. But each of the many winners has only a small gain to show, whereas the smaller number of losers have hefty losses. Furthermore, the winners may not feel like spending their extra bucks; they may choose to pay down debt or – horrors – save the money.
True, this is un-American behavior and conduct unbecoming to red-blooded shoppers. But it might happen – and if it does, the impact of the Texan recession will be far greater.
The same is true, on a different scale, in the UK, which will also suffer from the reduced inflow of money from the petro states, their kleptocratic rulers and their cronies, all engaged in skimming huge sums and using them to buy homes and businesses in the West, with London the biggest single beneficiary.
Yet, underlying these calculations is something more serious, which harks back to the original question: What caused the price crash? If, indeed, it was primarily weak global demand, with China’s economic miracle steadily slowing and Europe and Japan unable to achieve meaningful growth, then it is unlikely that the stimulus provided by lower energy costs will offset the damage suffered by producers, their investors and suppliers.
If the cause was essentially negative, then even if the consequences are diverse, there is no valid reason to expect them to be mainly positive.