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Asian Tribune is published by World Institute For Asian Studies|Powered by WIAS Vol. 12 No. 2676

Oil Price Crash: $10 a barrel is no longer consumers’ wishful thinking

Hemantha Abeywardena writes from London…

Up until extreme rationalists started looking down on them, there had been folks in Wales, Great Britain, who used to believe that the sound of an owl amongst their houses was a harbinger of an unmarried woman losing her virginity in the village.

Since the belief had the potential to book a place in the local mythology and folklore, the locals may have had a statistical justification for a significant period of time – in order to stick to this particular belief.

Harbingers of doom do not just belong to the previous centuries; they take place all the time, if you are vigilant enough to observe them, of course.

The turmoil that the world is witnessing in the financial markets and the oil industry at present clearly shows that we have been ignoring the harbingers of economic calamities at our own peril, while blurring out the reality with wool of complacency for years.

The entire world, as a whole, now has to pay a heavy price for ignoring them; it is just a matter of time, unless a miracle of biblical nature buckles the destructive trend. The steep drop in oil price was one such harbinger of doom, which we failed to grasp before it was too late. At the time of writing this piece, the price of Brent crude stood at $29 a barrel, a 24% drop in price since the beginning of the New Year.

plummeting oil price

The price of oil has been on a downward spiral since August, 2014; this year, it just got steeper. Investments banks, having talked about optimistic prospects while emulating the proverbial ostrich for months, suddenly started warning investors to brace themselves for the worst case scenario - $ 10 a barrel.

Meanwhile, in a stark warning to its clients, RBS, Royal Bank of Scotland called a spade a spade: “Sell everything except high quality bonds. This is about return of capital, not return on capital;” very scary stuff, indeed.

Then the bank went on to say about the best survival tip in the situation: “In a crowded hall, exit doors are small”. So, it was a call for get out – and doing it fast.

We can’t blame the RBS or any other major bank for this piece of advice; first of all, they have to protect the clients – in order to protect themselves, especially, if the bank in question had been offering advice to the clients to invest in the very stuff in the first place – something that it wants them to sell now. Secondly, they have to take defensive measures before flood gates of court cases are open - brought about by the clients for offering not-very-smart advice or even for misleading.

The plummeting oil price – as well as the corresponding bloodbath in the global stock markets – and the slowing economic growth, uncomfortably brings us to the age-old question: which came first? Chicken or the egg.

If you rely on the additional sense that some sensible folks are gifted with, the sixth sense, It is safe to assume that the falling oil price was the harbinger of slowing global economic growth, which had been made illusive, by the shadows of ridiculously useless economic indicators by vested interests.

Although, China is singled out as the epicentre of the present crisis, other players of the so-called Brics club are also in the same predicament, to a varying degree of pain, of course.

While sensing the far-reaching repercussions of a crash in the stock market, China introduced what it termed, the circuit breaker to keep the imminent dangers at bay: a 7% drop in the stock markets leads to the automatic suspension of the trading by the circuit breaker.

Since it failed to limit the damage, China was compelled to remove it from the stock market, paving the way for the inevitable – free fall of the values of stocks. In the end, the circuit breaker just lived up to its namesake – breaking the circuit, not necessarily stopping the metaphorical fire; in the end, the dire economic situation in China was laid bare.

The diminishing demand for oil stems from the slow growth, despite the so-called economic indicators showing otherwise. In addition, there is a plenty of supply of oil to such an extent that the conventional storage facilities have been full and the rest has been stored in off-shore tankers.

Making matters worse, the major players do not want to cut down on the production for the fear of losing their respective market share – and for some petty geo-political reasons too.

In this context, the anticipated arrival of oil from Iran, as early as next week into the market owing to the removal of economic sanctions, appears to be the last straw for the oil industry as a whole. The steady flow of hundreds of thousands of additional barrels to the oil glut, which is huge at present, is not going to buckle the trend any time soon.

Despite the stock markets being on fire, there is no respite in political front to remedy the situation either. If Donald Trump, for instance, a clear front runner who comfortably won the latest TV debate, gets the US Republican nomination, it will make a destructive impact on the stock markets worldwide, especially in the developing world.

Mr Trump, avowed, self-confessed, protectionist, has already been on record, saying how he was going to deal with unfair trade practices of certain global players that place the US at a distinct disadvantage; he has only very few kind words for China, the world’s second largest economy, economic state of which everyone is worried about.

The strangest development in the impending economic crisis is the way the relevance of most, if not all, of the well-known economic indicators went into oblivion by completely failing to grasp the unfolding disaster: interest rates are at record low levels; unemployment levels in the developed nations are not dangerously high; some corporate giants still make profits, that include some oil companies; inflation is at rock bottom and even encroaches the territory of deflation in some countries.

In this context, it is worth analysing the effect of money printing on the economic indicators, which dismally failed to gauge the current crisis until it reached the tipping point. You don’t have to be an economic expert to understand the destructive side of colossal input of money into the veins of national money supply, even as a last resort.

Judging by what we witness today, it goes without saying that calling the procedure, quantitative easing with a bit of glamour, does very little to lessen the lasting damage. In addition, it sets a bad precedent to the developing nations, which keeps emulating this move like the bull in the China shop in order to pull wool over the eyes of gullible masses that in turn guarantee the political survival of the elite.

- Asian Tribune -

Oil Price Crash: $10 a barrel is no longer consumers’ wishful thinking
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