The Trouble With the Falling Oil Price

Generali

Just a few thoughts really, sparked by a couple of pieces I've read recently about the falling oil price. (WARNING: Contains 1970s economics).

Oil price rises have a series of unusual and possibly even unique impacts on an economy. They act as an effective tax on net oil importing countries by oil exporters and in particular usually a small number of people who run the oil producing countries.

Oil is sold and the profits largely end up in the pockets of a relatively small number of people. Now one of the unusual things about the extremely rich rather than us mere mortals is that they want to maintain their wealth more than anything else. Yes, it's nice to make money but the correct place for extra wealth to come from is income, largely. Wealth is there to be protected.

So how is this wealth protected? Well it becomes what used to be well known as 'Hot Money'. This hot money chases around the world fleeing from inflation and falling currencies and is the biggest reason why an increase in base rates causes the currency to rise. This Hot Money is then invested in very safe, very liquid investments: put on deposit or into very short term loans ('money markets'). Effectively a lot of it is invested into the banking system one way or another or lent to Governments.

Now the oil price is collapsing having fallen from $110 a barrel to below $70 with no real sign of a turnaround. People keep telling me that the break even cost of getting shale oil out of the ground is $70 or $80 or $100 a barrel but the operating cost of shale oil companies are far lower and on a day-to-day basis all you need to cover are operating costs. Ultimately you don't need to pay more than a tiny fraction of your debts back because holders of the debt would rather get a tiny fraction back with you continuing to drill than none at all if you don't.

So if the oil price continues to fall, what next? Less money into the banking system and buying Government debt and more money into consumers' pockets. Really it's the equivalent of an increase in incomes and an increase in interest rates.

Food for thought anyway.

purch

Fortunately for President Pootin, the rouble is falling even faster so in the very short term his finances don't look too bad...........of course it can't last too long.

Generali

purch wrote: »

Fortunately for President Pootin, the rouble is falling even faster so in the very short term his finances don't look too bad...........of course it can't last too long.

The problem with running a kleptocracy is that the thieves will only support you as long as you keep lining their pockets. Putin's days may be numbered.

andyroberts1967

Generali, when you say it's the equivalent of an increase in interest rates, how do you come to that conclusion?

purch

Without this "Hot" money buying up Government Securities and improving liquidity in the Banking system, then yields will have to rise, one assumes.

Generali

andyroberts1967 wrote: »

Generali, when you say it's the equivalent of an increase in interest rates, how do you come to that conclusion?

What purch said. Less cash available to lend means higher interest rates are required to attract alternative deposits. .

antrobus

purch wrote: »

Fortunately for President Pootin, the rouble is falling even faster so in the very short term his finances don't look too bad...........of course it can't last too long.

Unfortunately for President Maduro, the finances were looking pretty bad even before the oil price started going south.

The International Monetary Fund estimates that Venezuela needs global prices to stay at least above $120 a barrel in order to stay afloat.

http://www.ibtimes.com/venezuelas-currency-bonds-plummet-government-grapples-oil-prices-1731469

Which I think translates into English as 'there is going to be a coup'.:)

In_For_A_Penny_2

Very insightful article on BBC (for a change) today on the politics of the oil prices in the Middle East.

http://www.bbc.co.uk/news/world-middle-east-30289546

MinerSteve

Where do you think the bottom will be for oil? back to 35? Maybe 45 will be the bottom.

One thing is for sure, this deflationary spiral is lowering prices of everything, its good news for us poor people. Bad news for wealthy people who have lots of investments.

I wanted to buy an electric car, but with falling oil prices I'll stick with my cheap petrol car.

Masomnia

I can't see how it will get that low. It must get to a point where the BPs, Shells and Totals of this world start operating at a loss and cut production.

CLAPTON

MinerSteve wrote: »

Where do you think the bottom will be for oil? back to 35? Maybe 45 will be the bottom.

One thing is for sure, this deflationary spiral is lowering prices of everything, its good news for us poor people. Bad news for wealthy people who have lots of investments.

I wanted to buy an electric car, but with falling oil prices I'll stick with my cheap petrol car.

why is it bad news for wealthy investors?
of course the value of oil stocks may fall, but as people use their 'spare' money to buy other things, the profits of all the other companies will rise and so their share price and profits.