Just how bad can cheaper oil be?
There are times, although I accept they are depressingly few, when it might occur to you that you actually know more than the market. I’m sure it occurs to people like Warren Buffet all the time, but to normal mortals, very seldom. And now is one of those times.
The fall in the oil price is neither bad for the global economy, nor for world stock markets. There. I’ve said it. And you could be forgiven for thinking otherwise.
You don’t have to go that far back in time to remember the angst that politicians and commentators alike displayed when oil prices went through the roof. “Those wretched Arabs”, leading Western economies a merry dance, lining their pockets as they benefitted from the happy coincidence of living above an ocean of the black stuff.
So, what on earth is going on now? Am I the only person rejoicing at the prospect of filling my tank up for less than the price of my annual food bill?
What is going on, is this. Largely as a result of OPEC politicking, Saudi has chosen not to limit supply into the market. This benefits Saudi as it also hurts both Russia and the USA in their role as competitive supplier to the market place. Saudi is flexing its muscle: “Remember who the boss is here.”
What excess supply does is depress prices. Prices can also be depressed by a reduction in demand, and this is where the current confusion lies.
Remember the context. Stockmarkets on Wall Street had reached record highs. Markets climb a wall of worry, and one of the worries accompanying this record rally revolves around the state of the global economy. For every encouraging number coming out of the US there is an accompanying question whether it be China one day, or Europe the next.
What world stockmarkets are saying is this: we were worried about global growth already; the oil price has come tumbling down; ergo, irrespective of the increase in supply, there MUST be a reduction in demand which means that our concerns about global growth are fully warranted.
Yet this is neither justified by the evidence, nor does it look ahead to the consequence on global growth of a sharply lower oil price.
We need to look at whether countries are net exporters or importers of oil, before deciding how good or bad a lower oil price is. Believe it or not, despite the progress made in recent years in the US with respect to both tar sands and shale deposits, the US is still a net importer of oil. Europe is a huge net importer of oil. Part of Germany’s current woes results from disruption in its supply lines from Russia. Japan, Korea and Taiwan, are all exclusively reliant on imports. The UK is a net importer.
Now what you may have noticed, from a global economic growth perspective, is that these net importers are the world’s largest economies, and therefore anything that benefits them, benefits the global growth picture. What are the Japanese desperate for? A growth stimulus. What is the fall in oil price? A growth stimulus. Which part of the Chinese economy are the authorities trying to stimulate? Consumption. What benefits the consumer? A falling oil price. In fact consumption is a cornerstone of economic growth is most countries, and without exception the consumer is a beneficiary of a falling oil price.
Global stockmarkets are getting this all quite wrong.
So, what has all this to do with fine wine prices?
Two things: firstly, fine wine is a luxury good, and luxury good sales are dependent on a healthy degree of economic comfort. Secondly, this emphasis on supply and demand in the oil market is a stark reminder of the importance of the supply/demand dynamic in all market places. No product in the world other than fine wine has a supply line which, eventually, HAS to become extinct. The last drop of every vintage ever produced will ALWAYS, eventually be consumed.
The oil market is currently behaving as if there is an ever-increasing supply, and always will be.
Imagine what would happen if all those people who now have even more money to spend as a result of a falling oil price suddenly realise that in the fine wine market quite the opposite is true, that supply is finite, and simply has to diminish over time.
APM
16/12/2014