Broadly Discriminating Investment Opportunities Arise from Plummeting Petroleum Prices

A fifty percent plunge in oil prices, on the surface, should work to the advantage of the global economy overall.  Indeed, according to the International Monetary Fund’s (IMF) latest empirical findings, worldwide economic production would receive a boost this year and next of 0.7 and 0.8 percent, respectively, assuming the shift in supply reflects sixty percent of the fall in futures prices.  Another simulation performed by the IMF, applying the same assumption but gradually unwinding a proportion of the price drop, predictably shows output augmented to a much lesser extent – 0.3 and 0.4 percent in 2015 and 2016, correspondingly.[1]

Even so, key distinctions among mature and developing economies in relation to their supply (or production) of and demand for (or consumption of) crude oil as well as in terms of their status as either net exporter or 

importer of petroleum, to mention just a few, distinguish those economies and markets advantaged and disadvantaged by the nosedive in the cost of this crucial hydrocarbon fuel source during the past six plus months, yielding a number of investment opportunities.

Producers of petroleum, on the one hand, are expected to suffer the most, especially in terms of lost revenue.  Deteriorating fiscal conditions of the major oil suppliers could not have occurred at a worse time.  Having just turned the corner from the last steep drop in crude prices mirroring the collapse in global economic demand attributable to the 2008 – 2009 Great Recession, Middle Eastern, Latin American, Eastern European, African and Asian petroleum producers are facing the grim prospect of yet another contraction in budgetary trends that are likely to entail significant short- and intermediate adverse macroeconomic consequences.

Emerging economies that seem at the greatest risk of a steepening downturn in real GDP and likely reductions in debt ratings and/or possible defaults as a result of receding oil-related income are Russia, Venezuela and Argentina.  Irrespective of the negative financial and geopolitical fallout to investor confidence from Moscow’s outright annexation of the Crimean peninsula, ongoing subversion in eastern Ukraine and persistent overflights of Baltic airspace, lower oil revenues should exacerbate the domestic recession by restraining the government’s power to stimulate economic growth via increases in official spending.  Worse still, dwindling oil exports put Russia at grave jeopardy of a near-term currency reserve crisis.  With the monetary authorities already having expended a substantial sum in defending the ruble against chronic depreciation owing to poor fundamental prospects and Western financial sanctions, tumbling oil revenue puts in acute peril the regime’s ability to service its debt and cover import costs.

In Latin America, Argentina and Venezuela remain quite vulnerable to turmoil in their fiscal accounts, entailing significant ramifications for the management of their respective national liabilities.  No strangers to debt crises, Buenos Aires and Caracas are already in difficult straits with respect to the servicing of their national debt.  Argentina has had no access to foreign sources of credit for some time because of its intransigence in its long-running dispute with hold-outs to a debt repayment deal.  Meantime, Venezuela’s political and economic chaos betokens persistent mismanagement of its diminishing oil revenues – which could trigger a credit event that seems increasingly unavoidable.  Needless to say, Buenos Aires and Caracas can ill-afford to undergo another debt-servicing cataclysm prompted this time by evaporating foreign currency revenues caused by plummeting petroleum costs.

Brazil and Mexico are at opposite ends of the production-consumption spectrum since the former is a net consumer and the latter is both a net supplier and exporter of the critical hydrocarbon fuel.  Normally, weak oil prices would aid Brazilian real income, manufacturing costs and visible trade account, and unpropitiously affect Mexico’s external payments.  Yet, because Mexico has become a growing manufacturing power due not just to its participation in the North American Free Trade Agreement (NAFTA) but more significantly in its own right worldwide, low crude costs will help curb domestic manufacturing costs, enhancing Mexico’s competitive edge.

Asian net importers of oil are projected to benefit the most from the spectacular drop in oil prices.  Last year, political expediency and budgetary discipline stipulated that the governments of India, Indonesia and Malaysia opportunistically lower onerous fuel subsidies amid improving living cost patterns advanced by the downturn in oil prices.  China, the sixth biggest supplier of crude globally, consumes more than it produces and – like its other regional competitors – should be a net beneficiary of the steep plunge in the cost of petroleum, which – in holding down domestic price pressures – give the Peoples Bank of China (PBoC) and the authorities in Beijing more leeway for stimulating internal demand.  Japan, a historically huge net oil importer, is expected to derive a much more muted inflation-adjusted income advantage from the plunge in crude costs on account of projected further weakness in the yen.

The dire outlook for government proceeds forebodes challenging times ahead for not only the domestic macro-economies of the top oil suppliers in the aforementioned regions, but also for those in the developed world.  Nonetheless, greater industrial diversification in the latter should cushion the economic downside in Norway, Canada and the US, still a net importer of petroleum, although a continued freefall in the price of crude would probably curtail fixed capital formation markedly in all three countries.

For virtually all of Western Europe, particularly the Eurozone, precipitously decreasing petroleum prices – insofar as they echo generally weak economic trends globally as well as stagnating activity and demand on the continent – are a mixed blessing, at best.  On the one hand, manufacturers naturally welcome sharply lower production costs from a resource perspective and the enhanced affordability they confer on their products, both regionally and internationally.

On the other hand, anchoring inflation expectations, in the wake of the European Monetary Union (EMU) having slipped into deflation last month, has become a much more difficult test for the European Central Bank (ECB) and other monetary authorities in the region to manage.  Even though the ECB and Swiss central bank have resorted to negative interest rates to stave off the declining cost of living phenomenon, only the ECB has begun to relax credit aggressively through purchases of asset-backed securities.  The alarming 0.4 percentage point deceleration in German household price pressures to 0.1 on a harmonized basis has bolstered ECB President Mario Draghi’s case for extending quantitative credit easing to the acquisition of sovereign and perhaps corporate debt.

[1] Rabah Arezki and Olivier Blanchard, “Seven Questions about the Recent Oil Price Slump,” 22 December 2014, International Monetary Fund,

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