Global oil prices sharply declined by more than 50% in the past few months. What will be the real “time bomb” for this “crisis”?
To be sure, there are actually a lot of winners from this steep drop in crude prices. The decline in oil prices is potentially favorable for a host of net-energy importers ranging from developed nations such as Japan and certain European Union members to emerging markets.
Keep in mind that the 45% decline in oil prices since the end of July acts much like a tax cut for consumers of energy.
Emerging market countries such as Singapore, Thailand and India, which are largely dependent upon imported energy, likewise enjoy an income windfall as energy costs have fallen.
The Obvious Losers
It is easier for most market commenters to pick up that countries, which lack reserve funds and rely heavily on oil to support state budgets and current account balances, will likely suffer from lost revenue and lower growth.
For example, countries such as Russia and Venezuela have significant oil related revenues. These countries have already been facing deep economic problems and are likely to experience more strains should depressed oil prices persist. The common questions which investors can ask ourselves are
- Is the much hyped North American energy revolution likely to suffer a premature demise?
- Will the collapse in the Russian ruble trigger a replay of the 1998 currency crisis?
- How will OPEC evolve as pricing discipline breaks down and the cartel’s effectiveness wanes?
But.. The real “time bomb” is in our financial system
Just picture this. Trillions of loans have been taken by these oil related companies from the bank or the public. When oil price drops so fast, definitely the weak companies will go bust.
When they default the loan, not only the banks and bondholders suffer, the cost of the loan will increase sharply, forcing those “resilient” companies go bust too.
In today’s world, where banks capitals are larger than some countries’ GDP, where trillions of leveraged products with no asset backing, where all the financial institutions are interlinked to each other, it is not hard to see how vulnerable our financial system is and how unsafe our money is with the banks.
When written in Chinese, the word ‘crisis’ is composed of two characters. One represents danger and the other represents opportunity. – John F. Kennedy
If it is true that Saudi Arabia hoped that lower oil prices would help throttle the US oil boom and maintain their market share, you will see a lot of blood on the street. This is going to the joust between the giants in the world and reshuffling not only the energy industry but potentially the financial industry too.
If you choose the right camp, you will be rewarded handsomely.