Oil plunge weighs against central planners

Oil futures are back at a 4-year low this morning, as the many cash-strapped OPEC members opted to keep gushing supply into swamped reserves.  Oil shocks are highly disruptive to global capital flows, and the rapid decline since June is reminiscent of the 2007 plunge before the 2008 recession.

Oil Nov 26 2014Oil producing countries have enjoyed a 15 year boom in prices off the $10.79 lows in 1999, with a full decade above $40 a barrel. The cash flow has been epic to say the least. But financial discipline does not follow from periods of lush cash flow and rather than prepare for the inevitable slow down, the past decade has been one of the greatest periods of waste and mal-investment ever in human history.   This has left the majority under-saved, highly indebted and utterly unprepared for the reality of mean reverting oil prices.  Venezuela and Russian prospects look more impossible by the hour.  The Russian ruble has plunged more than 45% against the greenback in just 6 months.  Currency and credit crisis loom likely.

It also means more deflation in the global economy, a force that central banks have been ineptly trying to counter with wave after wave of ‘stimulus’.  Falling oil now adds its weight to the other deflationary forces of excess supply, toxic debts and aging demographics. Free market forces are once more exerting their power, much to the surprise of all those so foolishly enamored of central planners.

A world with less cash and less access to credit, needs lower asset prices to restore equilibrium.  This process is an essential part of re-balancing the global economy.  It will also be incredibly destabilizing for those trying to ignore it.

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