Saudi Arabia has seen the future and understands that the world is moving away from oil. Eh tu Canada?
Saudi Arabia relies on oil exports for around half its revenues, but as low oil prices raise the country’s deficit, non-oil economic growth has been slowing too. Bloomberg’s Willem Marx reports on efforts by some Saudis to diversify the Kingdom’s economy.Here is a direct video link.
2016 political contests should be all about which leaders articulate the most defined plans to support a revolution of our energy, infrastructure and finance systems. All 3 issues are foundational, and present the most obvious opportunity to make dramatic and lasting improvement for our future.
A failure to enforce necessary controls and prosecutions in finance over the past 20 years has been a significant cause of the secular decline now gripping the global economy. It doesn’t need to be this way. We have the historical precedent to make lasting improvement. Better Markets has put together a helpful primer on the US Presidential candidates and who is saying what so far, along with a detailed summary of the Glass-Steagall financial reform law and efforts to reinstate it. Read the 8 pages here:
After the Great Crash of 1929 and the Great Depression of the 1930s, laws were passed to create layers of protections between the gambling on Wall Street and the hardworking American families on Main Street. Importantly, these layers of protections were of different types: structural, regulatory and supervisory.
The Glass Steagall Act was the key structural legal protection enacted. It prohibited the same bank from engaging in both relatively low risk traditional commercial banking (using FDIC insured and Fed backed savings accounts to make mortgage and business loans) and high risk investment banking (running mostly unregulated trading and securities). For more than 60 years, the Glass Steagall Act kept those activities separate and during that time, the U.S.had the highest rate of economic growth in its history while the financial system avoided catastrophic crashes.
The surest way to a reversal of financial fortunes is through negative cash flow (spending more than you earn). And over the past couple of years, cash flow has been plunging all over a highly levered (indebted) world.
The first natural response is to draw down cash reserves (savings), cut non-essential spending, tap available credit and sell assets (disposals) where possible. All options are finite. Beyond these, continued negative cash flow is the universal cancer that ends solvency for households, companies and countries. This chart from oil giant BP yesterday clearly demonstrates the math of revenues that crashed by more than half in 6 months. See: One simple chart that shows the problems facing big oil.
Thanks to decades of taxpayer subsidies and preferential political and regulatory advantage, BP has more stored fat than most. In the short run, it may also be able to further cut capital investments in its business. But if oil prices are not bouncing back soon, dividend cuts to shareholders are the next obvious ‘non-essential spending’ up for the chopping block. And it is not just oil companies that will be eying these.
The trouble is that over the past few years as interest rates flat-lined, investors with low risk-tolerance have increasingly herded into highly valued shares on the promise of dividend yields. They are dangerously banking on those promises now to sustain their own spending needs. This was always a bad plan.
Dividend cuts will prompt further cash flow reduction and thus spending cuts for customers, which will mean even less revenue for companies, further cuts, and so on. In a world that has grown accustomed to spending more than it should, the new normal of falling income is a huge adjustment.
