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Page added on December 14, 2014

The Aftermath Of The Great 2014 Oil Crash “A Textbook Macroeconomic Shock”

Not a day passes without pundits on either side of the debate, eager to make their case that the acute, nearly 50% plunge in the price of crude, swear up and down their preferred economic ideology of choice that said plunge is [bullish|bearish] for the economy. The reality is that the true impact of the great oil crash of 2014 will not be revealed for at least several months, however for those who can’t afford to wait, or simply lack the patience, here is perhaps the most comprehensive view of the pros and cons of what has now been dubbed a “textbook macroeconomic shock” by Deutsche Bank.

From Deutsche Bank’s 2015 Credit Outlook titled “Plate Spinning”

The Great 2014 Oil Shock – Aftermath

The fall in the price of oil – down more than 40% since June – is a textbook macroeconomic “shock”. Stripping it down to its most fundamental level, a fall in the price of oil predistributes real income from oil producers to oil consumers. Money oil consumers would have exchanged with oil producers for the stuff, can instead be put towards other purchases or savings. At the global level it means less spent on oil imports for oil importing nations and less income from oil exports for oil exporting nations. To put some rough numbers around this, US average net imports of oil and the like has averaged 5.2m barrels per day in 2014, thus the fall in the oil price by $43 since late June is saving the US economy about $224m a day on its net oil transactions and costing its oil trade partners the same amount. This is after accounting for the dramatic fall in US net oil imports driven in part by the country’s shale boom.

Therefore if oil prices stay where they currently are this appears to be a meaningful headwind for the big oil consuming nations. The biggest net oil importers in 2013 were (1) the US, (2) China, (3) Japan and (4) India. Major exporters will suffer. Probably the most prominent current example of an economy that will struggle to cope with the fall in the oil price is Russia, which in 2013 was the world’s second largest net exporter of oil. As we’ve already discussed, estimates suggest that at oil prices below $90 the Russian economy will go into recession and DB estimates the government will fail to balance its budget at $100 (Figure 133). At current levels none of the major oil exporters will be able to balance their budgets next year.

Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy. According to the IMF’s Tom Helbling, “a 10% change in the oil price is associated with around a 0.2% change in global GDP” (The Economist) as oil consumers are greater spend-thrifts than oil producers. Given those estimates the current fall of more than 40% should add about +0.8% to global GDP growth.

With so much of the global growth story resting on US shoulders next year the fall in the price of oil should help, although not as much as it used to given the USA’s shale boom. The EU should also gain given its $500bn of energy imports in 2013. However the drop in the price of oil might prove a mixed blessing given that sharp drops in the oil price will weigh on inflation (Figure 134) and another negative headwind to inflation (in any form) is not something the euro area really needs or wants currently with CPI running at just +0.4% YoY. On the other hand the drop in inflation pressures should be a boon for a number of EM economies whose central banks may otherwise have had to hike rates in the face of rising inflation even as their growth rates remained tepid.

It’s also important to remember that whilst oil is an important global commodity it is rare for it alone to drive global economic outcomes. The halving of global oil prices in 2008 didn’t prevent many of the world’s oil importing economies from suffering severe recessions and as Figure 135 shows there is no easy nor automatic relationship between falling oil prices and rising US growth. The environment within which the oil price change occurs is important. Indeed if the current drop in the price of oil is being driven by expectations of falling demand driven by expectations of a slowdown in global growth it’s possible that the drop in the oil price is at best going to partially cushion the global economy from a slowdown rather then drive it to higher growth rates.

Also importantly for investors, falling oil prices will not affect all areas of economies equally, even in those economies that should benefit at an aggregate level. As our US credit strategy team wrote recently, energy companies make up the largest single sector component of the US HY market at 16% (US HY DM Index) and so the falling oil price may prove a negative for the US HY credit market. Our US team added that if the WTI price fell to $60/bbl this would push the whole US HY energy sector into distress, with around 1/3rd of US energy Bs/CCCs forced to restructure, implying a 15% default rate for overall US HY energy which would contribute 2.5% to the broad US HY default rate. This could be a sizeable enough shock to cause concern throughout the rest of the US HY market.

There is no doubt that the fall in the price of oil in 2014 has been a significant economic shock. Most estimates suggest that this should add to global growth, weigh on global inflation and most likely have varied but oil-specific asset price implications (EM oil producing nations and US HY weakness stand out); however it is likely that growth tailwinds from this year’s fall in oil prices will not be the main story for investors in 2015.

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26 Comments on "The Aftermath Of The Great 2014 Oil Crash “A Textbook Macroeconomic Shock”"

Makati1 on Sun, 14th Dec 2014 7:35 am

Pounding Russia hard in the MSM Iron Curtain countries. Seems this anti-Putin/Russia rant started when he had the balls to step in and prevent another war in the ME by negotiating the disposal of Syria’s chemical weapons and then blocking other Empire attempts to replace Assad. Then anti-Russia flame get a dose of gasoline when Putin accepted the annexation of the Crimea. Now he has told the West that any arming of Ukrainian thugs .. er … troops with weapons could bring the Russian Military into East Ukraine.

Let’s see how suicidal the US Congress is. We know the Obaminator is pro war. Will the Senate go psycho too and vote to arm the Ukraine army? I know the M.I.
C. is already drooling over the profits. Even if they do not live long enough to spend them. Buckle up! Or is it Duck and Cover?

Rodster on Sun, 14th Dec 2014 8:02 am

“Let’s see how suicidal the US Congress is.”

They are pretty suicidal as Paul Craig Roberts warns. He encourages everyone to read the Wolfowitz Doctrine.

Davy on Sun, 14th Dec 2014 8:07 am

I smell cat piss. Yuk, you can never get that smell out of the rug. Is Mak around?

Mak, this article raises some good points that seem too great for the Makster curtain of fantasy and econ-fiction. Why can’t you admit Mak, your super heroes are going down just like the west. The worst part of it for you is the west has carrying capacity room. Asia is completely toast especially China and India. It is going to be ugly everywhere but catastrophic in Asia.

Rodster on Sun, 14th Dec 2014 8:36 am

“your super heroes are going down just like the west. The worst part of it for you is the west has carrying capacity room. Asia is completely toast especially China and India. It is going to be ugly everywhere but catastrophic in Asia.”

That’s been my thought as well. There will be no winners this time. The global financial system is too complex and interwoven for there to be any survivors other than the IMF coming in and backing everything with their SDR, god help us all if that happens.

No gold or anything else will save the East and I have been saying this for 3 years on other forums. The East is a mirror copy of the West. They have created and built their financial system to be a mirror image of the West.

bobinget on Sun, 14th Dec 2014 9:00 am

I can’t buy the ‘demand destruction theory’ for lower then cost, oil prices.

This article skips over low oil prices will have on North American oil (and gas) production over time.
America’s tight oil (and gas) miracle depends on
almost constant drilling. Christmas day off.. that’s it.
Watch as imports go higher in 2015.

So far most oil people share my view this little
scare has no legs. So says the last rig count.

If prices fall to low fifties as bears predict, with Venezuelan oil going to China, Mexico in steep decline, Canada’s oil sands looking like a pathetic rescue dogs, waiting for pipeline space,
imports are facing tough going next year.

Don’t forget, this market is out to screw over small investors. No one predicted this price drop because there are no genuine reasons to support it.
Notice over-all markets responded fearfully on news of plummeting oil thinking, ‘if oil is so low
it must indicate another depression’ Sell.

Next week or next year when oil prices begin to shoot higher, as they must. The same hedge funds
will come in and take your Blue Chips because, as we all know, world ends if oil goes over $147.

penury on Sun, 14th Dec 2014 9:08 am

Let me see, we have a dis-agreement on which economy can survive a reduction in the price of oil. Secondly a conversation on which society is more prone to start wars, if they feel a small amount of paranoia. The truth is neither will survive as it currently exists. The U.S is a dead man walking. All the wars, police actions and temper tantrums around the world has emptied our economy of most of the productive portions. A budget deficit of over a billion dollars a day will mount up over time. Russia will be attacked both economically and militarily but if Russia ever realizes that NATO will not stop until they have bases in Moscow, all shipments of anything to Europe must end. That their best interest is not served by letting the U.S. Congress declare war on them without retaliation is futile. And make no mistake the “Lame Duck” Congress just issued a “Declaration of War” against Russia. The bad days are coming. Keep shouting USA USA if it makes you happy.

Kenz300 on Sun, 14th Dec 2014 9:28 am

“Overall, most estimates suggest that a fall in the oil price is a net positive for the total world economy.
The current fall of more than 40% should add about +0.8% to global GDP growth.”

——————–

Enjoy the low prices while they last……

Producers will suffer in the short term…. consumers will benefit in the short term…….

In the long term we need to reduce our use of fossil fuels. Climate Change will impact all of us.

Davy on Sun, 14th Dec 2014 9:29 am

Pen, who here is shouting USA USA?

Davy on Sun, 14th Dec 2014 9:38 am

Bobby, you are suffering cognitive dissidence from believing in an economic reality that was put in the ground in 08. You fail to see the financial system and its relationship to oil production in a sense of catastrophic bifurcation potential. I know that is really spicy word salad but how else can I describe a situation that is out of control?

You feel like we have a healthy economy that will react traditionally to supply shocks with traditional economic reactions. Financial repression and global debt bubble changed all that. Corruption, manipulation, counter party risk, margin financing, excessive speculation, legalized disregard for rule of law and on and on.

Bobby, get a grip man this ship is sinking. Grab a life vest and breath deeply. Prepare for the shit storm.

Repent on Sun, 14th Dec 2014 9:38 am

Its had an immediate impact on the lower tiers of society. (Myself as a blue collar worker included)

It worked out to about $17.00 per fill of the tank less for the family car. I fill up once every 10 days, so this added about $52.00 a month to my family’s budget for the last 3 months.

For high income families, $52.00 a month would go unnoticed. In my case it’s meant some additional clothing and food purchases, which has reduced some stress.

This may be bad for the oil producing countries and nations, but this is a definite positive for the working poor.

shortonoil on Sun, 14th Dec 2014 9:48 am

No one predicted this price drop because there are no genuine reasons to support it.

We have been talking about this event since May of this year, and posted this page September 18. See chart# 160, second graph, the date is in the upper left corner:

http://www.thehillsgroup.org/depletion2_022.htm

There appears to be two very genuine factors that have contributed to the present price collapse: 1) the entropic decay of the petroleum production system, 2) the huge mal-investment created by the central banks present monetary policies.

Are you trying to convince people that they should believe you, “and not their own lying eyes”? Perhaps we should convert PO News to Comedy Central.

Davy on Sun, 14th Dec 2014 9:59 am

Repent, and the working poor deserve it. The sad truth is the shit storm this oil price shock is going to initiate is going to leave the working poor just poor minus the work. A consultation price for the working poor is how far the 1%ers and banksters are going to fall. The Banksters are already committing suicide and being murdered at a significant rate compared to normal.

Northwest Resident on Sun, 14th Dec 2014 10:39 am

There is nothing “textbook” about this oil crash or macroeconomic shock from my point of view.

Throughout the age of oil there have been numerous boom/bust cycles, and the economies of the world especially those of developed nations tended to ride that same boom/bust cycle right along with the oil industry.

Whenever there was a bust, the one thing we could always count on was the next boom, given the fact that we still had organic demand from billions of people looking to consume, we had oil sitting in the ground that was able to fuel that next boom, and we had a global economy that stood ready and able to finance the next boom — to flood the world with new debt in order to ignite another round of oil production and conspicuous consumption.

Today is different.

The global finance system destroyed itself to produce the shale/unconventional boom — way too much debt for far too little net energy. To try to argue that the global finance system has the capacity to finance yet another boom is to ignore the fact that we are already many trillion$ in debt that will never be paid off and that much of that debt is already crashing.

And most importantly, there is NO MORE OIL left to fuel another boom — nothing except more shale/unconventional deposits — the very thing that drove the world over the financial abyss to begin with. Those shale and unconventional deposits that still remain untapped are like the very thin slime at the very bottom of the barrel, the stuff that is nearly impossible to get due to physical and financial reasons.

So, trying to apply past textbook lessons to today’s situation is futile. We are in a situation never encountered before. In a sense, we have crossed the event horizon and are swirling down into the unknown of a black hole where physics and reality as we always knew them no longer apply.

We are leaving our current oil and technology based civilization behind and heading into a new and very uncertain world. If you can’t quite grasp that fact now, join the crowd, but please do keep checking that rear view mirror from time to time. It won’t be that much longer and you’ll begin to notice that with each new glance into the rear view mirror the picture comes into focus more clearly — lights going out, jobs being lost, retail outlets emptying, food prices going up, scarcities of all sorts. We are on our way.

Rodster on Sun, 14th Dec 2014 10:51 am

“It won’t be that much longer and you’ll begin to notice that with each new glance into the rear view mirror the picture comes into focus more clearly — lights going out, jobs being lost, retail outlets emptying, food prices going up, scarcities of all sorts. We are on our way.”

Hmm, sounds a lot like SW Florida where I live.

drwater on Sun, 14th Dec 2014 11:44 am

So Short – I like your model, but I have three questions:

1. Your graph 25 shows GDP versus cumulative petroleum production. Is that cumulative GDP or annual? Seems like mixing annual GDP with cumulative petroleum production is somewhat inconsistent, at least over longer periods.

2. Seems like there are other energy sources coming along that are getting pretty close to substituting for petroleum in terms of generating energy for GDP. Why wouldn’t those alternative sources continue to power GDP higher, albeit maybe at a much slower rate for a while?

3. Your oil prices are in 2014 dollars, so if we get some serious inflation at some point due to money printing, I suppose an increase in nominal oil prices is still consistent with your model, right?

Thanks.

drwater on Sun, 14th Dec 2014 11:44 am

So Short – I like your model, but I have three questions:

Thanks.

Apneaman on Sun, 14th Dec 2014 2:40 pm

Not long from now there will be some kind of “temporary pause” in environmental regulations for fracking and other industrial processes due to reasons of “national security”. Protesters will be labeled terrorists and traitors and thus be eligible for that special CIA housing and health care program. Oil people will convince themselves that they are being patriotic and “saving the economy”. All non western competitor nations will be spun as The Nazi’s 2.0-Putin will be accused of eating babies and raping women. The impoverished sheep will scream for Russian, Chinese, whoever’s blood while our elite eat caviar, drink champagne and laugh.

Perk Earl on Sun, 14th Dec 2014 4:23 pm

“In a sense, we have crossed the event horizon and are swirling down into the unknown of a black hole where physics and reality as we always knew them no longer apply.”

Nice analogy NWR, as everybody’s going to get stretched alright, and many stretched to the breaking point. Good luck to all – fasten your safety belts as we descend past the event horizon on the way to a singularity, which will result in a bunch of humbled, disheveled, hungry, exhausted, disgruntled, shaky, tearful, tattooed, pizza-less, last remaining survivors tilling the soil or getting booted out of the Permian culture commune, to drop like a stone in the heat of ever increasing temperatures due in part to GW momentum but also no more dimming from jets, factories, cars etcetera that spewed pollution to block about 1C of sunlight energy. The survivors are going to have to EARN it the old school way – one morsel of grown or hunted food at a time.

This dystopian imagery has been brought to you by a civilization that was bought and controlled by big money interests to keep BAU going as long as possible so those with money and power could keep having money and power as long as possible, in spite of being told over and over again that oil is a finite resource resulting in diminishing returns.

We will now take a break to enjoy some of the finer cuisine delicacies made possible by the last vestiges of the oil age.

Davy on Sun, 14th Dec 2014 4:49 pm

Perk, any rain damage your way. I bet it was strange to see so much rain after so long!

Perk, us dooms know the ship is sinking. At this point will it be a long emergency or a humpty dumpty event were BAU is broken beyond repair?

Degree and duration of descent are the key to the long emergency scenario. I feel society is so far extended in its basic survival abilities that there will be a quick and significant drop in economic activity which will translate into food and energy shortages.

Food and fuel shortages becomes an issues of social cohesion. Will good decisions be made collectively. We know individuals will make some good and bad decisions. If BAU is pursued at all cost we can expect cascading failures from poor policy decisions.

What other black swans have been let lose from the oil price shock? What will be the next nasty surprise. Will Russia lash out? Will Israel make good on its Iranian threats? Crazy days my friends

Energy Investor on Sun, 14th Dec 2014 6:15 pm

I tend to agree with short…

Remember the demise of whale oil? The prices in the last 10 years or so spiked up and down alternately. Sometimes the risk of getting a full load of oil, the time it took to get the catch, then the glut or scarcity risk when returning made for a totally unpredictable industry.

That is what brought in parafin from coal and then “rock oil” when oil started coming one stream.

Today, a downward spike will trash alternative energy storage substitutes. Making them uneconomic.

My pick is that GD1 (the world’s first great depression) has started.

Perk Earl on Sun, 14th Dec 2014 9:58 pm

“Perk, any rain damage your way. I bet it was strange to see so much rain after so long!”

Storm of the decade is what I saw on one headline, Davy. At our house and in our community, no damage, but our area is hilly and sheds water well. Thanks for asking though. This whole rainy season has gotten off to a strong start as expected with El Nino and do we ever need it.

What part of the country are you in?

What other black swans have been let lose from the oil price shock?

That’s a good question. Gold is starting to go up and suggestion is world economic recession must be in the offing. What’s interesting about that is it seems like a situation in which this recession will not start here in the US, but may influence our economy into a recession. Has that happened before? Seems like usually the US leads the world economies up or down. Maybe globalism has grown up and now it no longer takes the US to initiate a slow down.

Davy on Mon, 15th Dec 2014 4:59 am

Perk, I am located in the Ozarks of south central Missouri near the town of Rolla. I am on a 350 acre family farm. I have turned it into a doomstead but that is under the surface and little is visible. I appear to be a gentleman farmer with some cattle, garden, bees, orchard, grapes, and soon chickens. The place is full of blackberries and walnuts. The farm is full of wildlife. There are some nice lakes also. It is a great place for someone who likes nature. It is a bit boring for someone looking for excitement. With the nasty excitement coming soon I would rather be here than a big city. Excitement is a relative thing i.e. not always a good thing.

Perk, Gold is a great economic indicator that the economic TPTB will have a painful time trying to smack down like in the past. It is a direct threat to the central banks interest rate repression. Oil, as we are finding out is another excellent indicator of the real economy. These are the real economic indicators because corruption and manipulation is limited in these markets.

Dredd on Mon, 15th Dec 2014 6:40 am

Another lame post that does not understand the problem.

The price of oil is not the problem.

The use of oil is the problem.

OPEC (Oil Produced Ecosystem Catastrophe).

“Even with a deal to stop the current rate of greenhouse gas emissions, scientists warn, the world will become increasingly unpleasant. Without a deal, they say, the world could eventually become uninhabitable for humans.”

(NY Times, 11/30/14)

Perk Earl on Mon, 15th Dec 2014 11:39 am

Wow, great property, Davy. 350 acres? That’s huge. Nothing boring about it in my opinion. Lakes too – that’s very nice for enjoyment and as a water source if needed. Nothing wrong with Walnuts and blackberries – great stuff. Sounds like you are not very visible – good call. You’ll really appreciate the seclusion once things go south.

Our community is called Hidden Valley Lake, CA and our house overlooks a manmade lake with a levy. We have a pontoon boat in the marina and can see it from our house. We also have lots of wildlife – deer galore as they like the safety of the community from potential predators like mountain lion. Not far from here is Cobb, Mountain. I know a guy up there and he regularly sees black bear. Mostly what we have are deer, see occasional coyote, a few bobcat, rabbits, lots of raccoons, opossums, ospreys, otters (which we never see but understand are in the lake area because sometimes we will come across a chewed on fish carcass on the marina docks). The lake has big mouth bass, trout and catfish.

We use to live in Marin County, CA, but that is one of the wealthiest parts of the country and very expensive to try an get ahead. So we moved up here which is about 70 miles north as the crow flies but further by car of course, but we can drive to the Bay Area on business when needed. We love this area, the quiet as compared to Marin, although it is a fairly large community of about 4500 people. The houses are all different and all built on hills, so it has a lot of trees, some very tall like pine and so it is very picturesque.

It won’t compare to your locale post collapse for survival but is the best we could do. I’m sure your family will do just fine.

Davy on Mon, 15th Dec 2014 11:52 am

Perk, back in the early 90’s a guy from Chico came to MO to repair levees after the 93 flood. He went back to Cali with the equipment we sold and financed. I had to do a collateral check and spent a week out in that area. He was using the equipment on forest service jobs so I was all over the area between Chico and the cost. I really liked the country up there.

Remember Perk, survivability is greatly dependent on the community’s orientation to sustainability and resilience. Around here we have a good level of that for no other reason than people aren’t very wealthy here so you make ends meet best they can. I notice when I was in North California there was a good attitude about sustainability and resilience. I am sure some areas with migrants from the big city may lack this. I hope the best for your preparations.

Perk Earl on Mon, 15th Dec 2014 2:00 pm

Interesting info. on your time in Chico a few hundred miles north of us. Just east of Chico up in the mountains is gold country – or was before it was mostly taken out. We stayed up there for a weekend. There’s an entire community of small claim owners collecting small amounts of gold.

Anyway, ours is nice tight knit community here in which people I am sure would pull together. I’m figuring the golf course can be converted into growing crops although I’m not going to suggest it yet – lol. People are semi-affluent here, so a lot of adjusting would need to take place post collapse vs. your area sounds like it will do a better job of taking it in stride. However, we will certainly be glad we aren’t in the Bay Area once things go south. Too many people in too small an area.

In any case, at least we both know what is coming sooner or later and trying to do the best in preparing.

The Aftermath Of The Great 2014 Oil Crash “A Textbook Macroeconomic Shock”

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