Very few asset markets have escaped the recent oil price plunge unscathed. The African growth story now seems suspect and countries such as Russia and Venezuela appear on the verge of economic collapse (see my October piece “Saudi Sows Budget Busts” HERE). Is it possible that a currency crisis snowballs into an emerging market meltdown? Let’s not forget that the Asian Financial Crisis began with currency mismatches in Southeast Asia. Just as the Thai entrepreneur who earned in Thai Bhat but took on US Dollar debt suffered in 1998, so too are today’s Russian companies with US dollar debt feeling the pinch of a Ruble in free fall. (See chapter 9 of my book BOOMBUSTOLOGY). Norwegian and Nigerian businesses are likely also feeling the pain of falling local currencies.
Global credit markets have also reacted, with investors (suddenly) noting the heavy issuance of junk bonds by speculative oil and gas companies (see HERE). Then there is the obvious slowdown coming in oil and gas construction and its corresponding economic impact – which will affect almost every hydrocarbon producing geography on the planet. The list of potential losers is long, ranging from banks and home-builders exposed to the Dakotas to Norwegian oil service companies supporting Brazilian exploration projects (see HERE).
Within this oil slick, however, there are also numerous winners. It’s not unreasonable to think about plunging oil prices as a global ‘tax’ cut that benefits every user of oil. At the country level, the largest importers of oil clearly win…and at the top of that list is China. Is it conceivable that lower oil prices can help stimulate the much-anticipated Chinese consumption boom? Europe may get the double benefit of lower oil prices as well as a stronger Chinese trading partner. A conscious Saudi plan to help restore the economic health of key long-term customers? Industry winners include transportation (airline stocks have definitely taken off!), retail (consumers have more money thanks to the ‘tax’ cut), etc.
Lest you think picking winners is easy, consider the fact that we’ve effectively just suffered a massive deflationary shock – not exactly the prescription a global economic doctor would order for today's debt-laden world! But then again, if the strongest wage pressure in the US was in tight labor markets around the North American oil and gas boom (see HERE), then might the energy slowdown remove inflationary pressures, allowing the Fed to keep rates lower for longer? Or could the lower energy prices sentence Japan to another deflationary decade? Or might lower oil prices curtail Mexico’s attempt to privatize its energy industry?
Amidst these uncertainties, one thing seems crystal clear: plunging oil prices are generating a gusher of questions for which there may only be cloudy answers.