After years of global economic expansion in most countries since the last financial crisis, it seems we have another potential one looming. This is especially bad for a handful of countries whose economies never got going in that period –– such as Venezuela, Russia, Barbados, and a few others.
So what is this financial crisis all about ? If someone told you that low oil prices would cause a global downturn just a few months ago, you and others would have every right to laugh. Low oil prices should stimulate the world’s economy. That has been the rule of thumb over many years since the discovery of oil.
Low oil prices usually translate to cheaper prices and consumers spending more the world over.
This time it is a tad different. As more and more countries, and thus also persons, rely exclusively on the price of oil, it means that when oil prices are down this has a negative impact on global demand. A stark example of this is Venezuela where the socialist government, now out of power, relied heavily on subsidies to provide social care.
On a macro level this means that many producers of commodities in Latin America, Africa and Asia are slowing down. In addition to this, big sovereign wealth funds are now liquidating some of their investments around the world to replace the lost oil revenues, which results in job losses outside of the oil and commodity sectors.
Many football fans may even start to wonder if football clubs will end up on the auction block, however unlikely.
What is the good news for the oil market? The good news is that the oil market goes through these wild shifts and swings, every decade it seems. The return to normal will see the closure of high-cost shale producers in the United States.
This bit is good news for the oil market, but comes with a caveat of sorts. These shale producers will be unable to repay enormous loans provided by American banks. If this sounds familiar, let me know.
It is being referenced as the crisis that everyone saw coming; but this is the good news section. Currently United States banks are wary of calling these bad loans, according to many observers, as that may spark other new businesses that are reliant on the oil industry to go bankrupt. This in turn would lead to more bad loans.
According to my predictions, the American banks should pull the plug between April and August.
This event, should it happen, has implications for the United States presidential elections, of course, with any downturn likely to be seized upon by the Republican party.
What about Canada (and regional banks)? Canada’s economy is also suffering because of a range of factors, including low oil prices. It is unclear to me at this time how over/under-leveraged Canadian banks are to this current oil shock. It is clear though that their actions in the region suggest they do understand the upcoming risks, as they try to reposition themselves in the event of future financial shocks.
The next time you overhear an analyst saying that cheap oil is good for the global economy, step back and ask why that is so. The world is always just a bit more complicated than we would like to give it credit for.
(Craig Harewood is the investment director at Ourinterest Inc., an investment company that trades on global markets and from time to time assists small businesses and boutique investors.
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