Low oil prices are bad news

drilling oil

Low oil prices have roiled global financial markets and oil exporters

Crude-oil prices have collapsed by 70 % since mid-2014. Ever since, low oil prices have been championed as good news for consumers. However, motorists who think that the drop in oil prices is reflected at the petrol station, will be disappointed.  Multinational oil companies have clearly been taking them for a ride (only metaphorically speaking, sadly). There is a huge disparity between crude oil prices and gas prices.

Beyond end consumers, powerful producers have taken a huge hit. But in spite of falling prices per barrel, countries are still increasing production for fear of losing market share.

Saudi Arabia faced a $ 98 billion deficit in 2015, due in part to its overproduction of oil in response to increased fracking by their ally, the US. As a result, the country is also considering selling a piece of its crown jewel — state oil company Saudi Aramco.

Russia, Brazil, Venezuela and Nigeria are in a similar situation: they have reported a steep decline in their GDPs and have seen their currencies trading at  record lows.

What does this all mean for international capital flows? Lower crude prices have led to a withdrawal of petrodollars  by oil-exporting countries and less recycling of those funds back into global financial markets.

Citi strategist Jonathan Stubbs compares the situation to a “Oilmageddon”: Weak global growth spurs demand for the U.S. dollar; a stronger U.S. dollar (together with oversupply) drives down the global price of commodities; and low commodity prices hurt developing economies dependent on exporting raw materials, thereby weakening global growth, which spurs demand for the U.S dollar, ad infinitum. This process repeats until we arrive at “Oilmageddon,” an economic apocalypse defined by perpetually low oil prices and “a ‘significant and synchronized’ global recession and a proper modern-day equity bear market. Is the global economy trapped in a death spiral?

No good news, really.