Oil: victim of deflation

Oil: victim of deflation

janvier 30, 2016 0 Par Michel Santi

pétrole

The collapse in oil prices has not brought with it the happiness that had been counted on, since economic fundamentals have not improved. As for Western consumption, its slight progress is owed more to a further drop in inflation indices than to an increase in salaries and revenues that is worthy of being called so. It is certain that the stagnation of investment and exports for countries with “integrated” economies are now attracting interrogation since the liquefaction of oil prices could nevertheless have foretold a more spectacular improvement in their respective GDPs…

At the same time, the emerging world is coming undone – indeed agonising – and is suffering tumults as bad as during the darkest episodes of 2008 and 2009! It is therefore at this stage becoming indispensable – at least in terms of intellectual honesty – to ask the question of all questions: have energy tariffs tumbled following diabolical manipulation on the part of certain producer countries…or because of inexistent global growth? In the latter hypothesis, the drop in oil prices would be the epiphenomenon of an unhealthy economic situation rather than a prelude to the euphoric economic take-off that is hoped for. In other, more cynical terms, oil producer and exporter countries’ suffering is in no way being counterbalanced by the recovery of consumer nations.

This is why the collapse in oil prices – which has reached abhorrent levels in the space of little more than a year – can henceforth be analysed from a diametrically opposed angle: this fall is much more a sign of stagnation – deterioration even – of our conditions, than of a growth stimulator! In fact, Wells Fargo & Co., Citigroup Inc. And JPMorgan Chase have already had to provision 2 billion dollars for their partner companies’ massive losses, who are active on the gas and oil markets. The moment when these financial institutions – and others throughout the world – will be reduced to a painful choice seems close. That is, to take drastic action: continue helping their clients to stay above water, or worry about their own survival… It is a genuine dilemma that has been complicated terribly by the price collapse, which will force them to sell at $30, though the safeguards to protect them were put in place when the price of a barrel was at $100!

My own sentiment has now come to a halt, given that this fossil fuel price debacle is in fact an added element that has broken into the deflationary spiral that now reigns supreme over the whole planet. In this light, the US Federal Reserve’s recent decision to raise interest rates is at the very least risky – even careless. Having deceived us for some time, this oil price liquefaction has therefore not produced the beneficial consequences counted on by economists and dictated by logic. The losses are only just beginning to show in what will certainly remain the most striking episode of 2016.