Potential Financial Crisis on the Horizon (Iran, Obama, solution, how much)
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It appears that a financial war is currently taking place between the US and Russia. Additionally, it appears that long term US ally Saudi Arabia, has decided to go in another direction, much to the dismay of US policymakers.
Exchange rates have lowered the cost of capital for Russian energy companies. Unlike their American counterparts, they are managing to stay profitable, even at significantly reduced energy prices. Russia is producing crude at record levels.
American tight oil producers have mountains of debt. Additionally, the high yield bond market has very little liquidity, and the possibility of default rises everyday that the price of oil stays at current levels, as companies struggle to breakeven. Furthermore, it is not the energy sector alone that is in trouble, but its suppliers and other related businesses.
Saudi Arabia has shown no signs of letting up on production. The US has used the IMF and bond rating agencies to try and downgrade Saudi Arabia, making it less attractive to investors, and perhaps trying to incite a run on Saudi banks; however, it has had very little effect up to this point.
If the price of oil does not rise soon, there is significant risk of default. Worse, after companies default, it would not surprise me to see a significant reduction in production, which will cause an oil price shock, sending the US into a recession. This will not only weaken the US, but it will also cause investors to lose confidence in the dollar and dollar denominated assets.
At one point articles on an upcoming recession kept "popping" up.
Basically, recessions, like men (joke!!) have a seven year itch. Apparently we're close to feeling that itch coming and will be scratching that itch in 2016.
The collapse will be huge whenever it happens. I'm hoping people wake up and see how massive debt - and central banks printing tons of money out of thin air as a "solution" - is so destructive to an economy and society. They'll try to blame Wall Street and greedy private companies, but they aren't the core issue. When people, including the government, are fiscally irresponsible, bad things will happen somewhere down the line.
This coming crisis will be unprecedented, and when things get out of hand, I hope people will finally learn...resources are not infinite, but politicians will ignore the long term consequences in order to get elected and reelected in the short term. It's political suicide to propose actual cuts in the budget. Then it build and builds and keeps getting put off until....everything falls apart.
So the drop in oil prices doesn't impact Russia because of exchange rates set by Saudi Arabia?
Russia has no choice, oil went from $100 to $40 a barrel, did we expect them to cut production of the product that drives their economy. They have no other options.
Quote:
The bank estimates that Russian output this year will average around 10.6
million barrels of crude a day. That is above the 10.58 million barrels a day
the country produced last year, a level of output not seen since the end of the
Soviet Union.
So the drop in oil prices doesn't impact Russia because of exchange rates set by Saudi Arabia?
Russia has no choice, oil went from $100 to $40 a barrel, did we expect them to cut production of the product that drives their economy. They have no other options.
The drop in oil prices does effect Russian energy producers; however, Russian oil companies pay their debt in rubles, but sell their product in dollars.
The ruble has depreciated in value compared to the dollar, but the dollar has appreciated in value compared to the ruble.
Due to this, Russia has lowered its cost of debt capital. This is also why Russian oil companies are still profitable, and can afford to produce at record levels.
Unlike the Russians, American oil producers both pay their debt and sell their product in dollars. American oil producers are struggling to breakeven at these rates.
In the short run, American producers should continue to produce oil as long as they can pay off their fixed costs; however, if they are unable to pay their total costs in the future, they will be forced to go into bankruptcy.
This is likely why American oil production did not fall until recently. Under normal circumstances, non-conventional (mostly American tight oil producers) were necessary to meet global demand; however, with the Russians and Saudis producing oil at record rates, non-conventional oil suppliers play a reduced roll, so long as conventional production meets global demand.
If we suppose that the Saudis and Russians are working together, which appears to be the case, it will only be a matter of time before American tight oil producers are forced to default on their debts. This means that there could be a potential collapse in the high yield bond market, which could carry over to other markets, including the equity market if there is a reduction in liquidity.
Additionally, if the Russians and Saudis are successful in causing American oil producers to default, they could decide to cut production, which would likely exacerbate the American financial problems.
The drop in oil prices does effect Russian energy producers; however, Russian oil companies pay their debt in rubles, but sell their product in dollars.
The ruble has depreciated in value compared to the dollar, but the dollar has appreciated in value compared to the ruble.
Due to this, Russia has lowered its cost of debt capital. This is also why Russian oil companies are still profitable, and can afford to produce at record levels.
Unlike the Russians, American oil producers both pay their debt and sell their product in dollars. American oil producers are struggling to breakeven at these rates.
In the short run, American producers should continue to produce oil as long as they can pay off their fixed costs; however, if they are unable to pay their total costs in the future, they will be forced to go into bankruptcy.
This is likely why American oil production did not fall until recently. Under normal circumstances, non-conventional (mostly American tight oil producers) were necessary to meet global demand; however, with the Russians and Saudis producing oil at record rates, non-conventional oil suppliers play a reduced roll, so long as conventional production meets global demand.
If we suppose that the Saudis and Russians are working together, which appears to be the case, it will only be a matter of time before American tight oil producers are forced to default on their debts. This means that there could be a potential collapse in the high yield bond market, which could carry over to other markets, including the equity market if there is a reduction in liquidity.
Additionally, if the Russians and Saudis are successful in causing American oil producers to default, they could decide to cut production, which would likely exacerbate the American financial problems.
How much could the exchange rate make up for $100 vs $40 oil. There is a rather large downside to having the ruble depreciate in addition to decreased investments in Russian debt. Russia doesn't have many options outside of energy what else can they do other than increase production.
The energy industry is feeling the impact of lower oil prices, many are walking away as it is not profitable at these prices.
The reason both Saudi Arabia and Russia are flooding the world market with enough oil to lower prices is to discourage and or prevent Iran from making profitable deals when the sanctions are lifted. These prices are set by politics not economics.
Oil crashed even worse back in 1986 than it is today. The big oil states like Texas went into recession but most of the country did quite fine. I think Florida was even thriving that year.
Some people just like to live in gloom I suppose. I'm case any of you missed it, the best job report of the year came out this morning.
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