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Cheap Oil May Be a Problem for the World

Cheap Oil May Be a Problem for the WorldCheap Oil May Be a Problem for the World

For the last 75 years, almost every economic crisis has been preceded by an oil price spike. The worry now is that low energy prices are pushing the global economy into a tailspin.

While the idea is counterintuitive, it is gaining traction because a growing share of the world’s consumers and investors are in the very places getting hammered by the rout in commodities prices, Bloomberg reported.

Apple Inc., for example, blamed weaker sales last quarter on lower economic growth in some oil-rich countries.

The problem is that the world’s economy relies far more today on emerging countries than 15 or 25 years ago —the last periods of ultra-low oil prices. In another twist, the US has emerged to vie with Saudi Arabia and Russia as the world’s biggest oil producer. In the past, the harm done to exporters was more than offset by importers’ gains.

And with the exception of China and India, most big emerging countries are oil and commodities rich. Such economies now account for about 40% of global gross domestic product, about double their share in 1990, according to the International Monetary Fund.

From Russia to Saudi Arabia, Nigeria to Brazil, economic growth is slowing down to a crawl and, in many cases, is contracting.

The market sees Venezuela, one of the world’s top 10 oil exporters, as a likely default candidate. The IMF and the World Bank, meanwhile, are already in talks with Azerbaijan and Suriname to provide emergency loans. Nigeria has also asked the World Bank and the African Development Bank for help.

To be sure, oil could find a floor as soon as the world economy does. The slowdown in China has reduced its demand for commodities, meaning stabilization there could prompt crude to rebound.

“The reality is 4 billion human beings are going to have cheaper energy, cheaper heating, they’re going to have more disposable income,” Fink said last month. “And ultimately that’s going to re-accelerate the global economy. It may take six months, it may take a year but this is all good.”

Francisco Blanch, commodities analyst at Bank of America Merrill Lynch, argued that a sustained oil price plunge "will push back $3 trillion a year from oil producers to global consumers, setting the stage for one of the largest transfers of wealth in human history."

 

Financialtribune.com