A barrel of Brent oil cost $125 in 2013; it is now $28. Can we absorb the shocks?by George Magnus / January 18, 2016 / Leave a comment
Why have financial markets been so poorly behaved so far this year? Take the UK. You may not know it, but the UK is enjoying the equivalent of a £7 billion tax cut. UK motorists consume nearly 1.5 billion litres of petrol each month. The price has fallen about 30% since the peak in the spring of 2013, and half of that decline has happened since the end of 2014. You would imagine this might be a cause for economic joy here and the world over, but no.
Global financial markets are in varying degrees of turmoil. In the first two weeks of the year US equity markets dropped by eight to ten per cent, the FTSE-100 index has now fallen seven per cent, other European and world markets are down 8-11 per cent, and China’s equity market has slumped by 18%. Strategists at two large banks issued warnings last week; one said to “sell everything except high quality bonds,” the other opined that the US’ Standard and Poor stock market index in the US could drop by 75%. Estimates of economic growth are being lowered again, and some people think we are on the cusp of the next global recession.
A barrel of Brent oil that cost $125 in 2013, and still $65 in the first part of 2015, closed at over $28 at the end of last week. It really is bizarre that financial markets and commentators have come to view lower oil prices as bad news. The corollary is that it would be good news if oil went back to $100 a barrel as quickly as possible, which is nonsense except for oil producing companies or states.
So why are flailing markets and a collapsing oil price, which give off diametrically opposite macroeconomic messages, locked in some sort of death spiral
What’s happening is that a major commodity bubble is being unwound. It started in about 2005-06 and continued until 2014, punctured by the financial crisis in 2008-09. The principle catalyst for the bursting is that commodity-intensive growth and economic reform in China have stalled, but there is also a wider hiatus in economic growth in emerging…