Dying Oil Prices – Who are the winners and losers?

Global oil prices have fallen sharply over the past eight months, leading to significant revenue shortfalls in many oil exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes, drive their cars or run their energy houses.

From 2010 until mid-2014, global oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

The reasons for the decline – China slowing down coupled with US surging production & shale gas revolution, OPEC’s determination to not to cut production and Iran edging towards entering global trade, black market sales from Iraq & Syria which means additional supplies.

So who are the WINNERS?

Mainly those countries that need to import oil. Within Asia, China, India, South Korea, Japan and Thailand have been the gainers. The benefits, cutting them short, lower inflation, lower business costs, improved purchasing power, correction of balance of payment and cut in interest rates!

Cheaper oil translates into lower inflation. Oil is used as a raw material in various industries such as petrochemicals, fertilizers and etc. As oil prices decline, the logistics become more economical and hence consumers will have to pay less. This will also make these products more internationally competitive. However, most of the agro economies in Asia continue to rely on imports of both petrochemicals and fertilizers due to increasing demands, unusual weather patterns and logistic issues due to poor infrastructure.

Both India and Indonesia have taken the opportunity to cut energy subsidies and raise taxes on energy. India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India's fuel subsidies could fall by $2.5bn this year - assuming oil prices stay low.

Consumer inflation has hit a 5-year low in China. However, lower oil prices won't fully offset the far wider effects of a slowing economy.

Who has lost and why?

Most of the big oil producers like Malaysia and western Asian countries. For Malaysia energy exports account for 20% of the national economy, so cheaper oil is a problem.

Saudi Arabia, the world largest and the most influential oil exporter, needs oil prices around $85 in the long run, but seems less interested to cut down supplies in order to pressurize the US shale gas industry and it can afford to continue this way for long as the country sits on a reserve fund close to $700 billion. Gulf producers such as the United Arab Emirates and Kuwait have also amassed a considerable foreign currency reserve, which means that they could run deficits for several years if necessary.

Europe is an interesting case here. A lot of analysts believe that Europe in general will benefit from the collapse in oil prices but its exposure to Russia jeopardizes the benefit realization. A recession in Russia and depreciation of the Russian Ruble will reduce investments in Moldova, Armenia, Belarus and all those European states which are vulnerable to dislocations in the Russian labor market because of the reliance on remittances from Russia.  Plus most of these countries import oil to process into other products such as petrochemicals and fertilizers, for which oil accounts for major portion of the cost. A decline in oil prices means fall in prices of these commodities too.

US default 'extremely unlikely'

Before we go deep into the mess, it is important to highlight the difference between a shutdown and debt crisis. In simple terms, in a shutdown, the government lacks the legal authority to spend money on non-essential services. In a debt crisis, the government is mandated to spend money — but doesn't have the legal authority to borrow the money to spend it.

What happens if the debt crisis occur (post 17th October) ? - A Default!

U.S. will certainly default if it does not pay its bills on time or the debt ceiling is not raised. Ahan - then the debt ceiling should be our discussion as it is the only temporary, please note, -TEMPORARY life line. If the US does not raise its USD 16.7 trillion debt ceiling "temporarily" by October 17, the country will default on its debt.

What US could potentially do:

The most extraordinary measure the government could take and that is to exhaust its cash. It is expected that the U.S. will have about $30 billion in cash, which will be short of expenditures that can reach as high as $60 billion in subsequent days. This is dangerously low level of cash in the bag.

The US government could use all their tax revenues to meet their interest payments on debt and roll-over the existing debt. They will have to take extreme measures such as cuts in public spending (healthcare programs) and defense spending. This will attract a lot of repercussion from the public, but it has to happen one day, then why not today!

President Obama is left with no option but to kill the fly

Even if the Congress decides to raise the debt limit, the republicans will be looking  for some very critical areas, prior to the approval, such as cuts in government spending, reducing the impact of Obamacare and no new taxes. They will keep their focus limited to the spending. An ice-break could prevent:

- Sliding US Dollar

- China catching the cold; biggest buyer of US debt

- America gets downgraded again!

- Banking industry getting banged
- Army pull-out

You are broke because you have overspent, and a correction is required not delay. Again, in simple words - Open the government and pay your bills.

Forgive me for using the word "Temporary" temporarily and wish not to use this again in near future.

Japan - The latest sick man of Asia?

The Japanese are going through an immense economic+political transformation with a collapse in the export sector in a much globalized version of recession and the more radical promises of the political parties such as increased spending on military and tougher stances on territorial disputes with neighbors which worries China.Till date, Japan's involvement in global politics, at least since the world war 2, has been only to the extent of summits which has helped Japan in promoting a soft image of itself as a global producer for many established brands. Such as portrayal did not only contribute to Japan's growth, but it benefited the entire region including China and the Koreas.

Shifts in paradigm can have some serious repercussions for  Japan and in fact it has started to face some.

Japan recorded a Government Budget deficit equal to 9.70 percent of the country's Gross Domestic Product in 2011. Historically, from 1960 until 2011, the Japanese government budget averaged -2.7% of GDP reaching an all time high in 1961 of 2.6% of GDP and an all time low of -10.5% of GDP in 2009.

The Japanese finance ministry reported a 549 billion yen trade deficit in Nov. 2012, higher than expected. The major cause of this decline is due to the territorial spat over islands between China and Japan which has in turn impacted the shipments to China, Japan's largest export market. The Chinese have initiated a strict boycott of Japanese products which has not only impacted Japanese exports to China but Japanese manufacturers who run facilities in China to meet consumer demands around the globe. 

A weak Japanese yen is not strenuous enough to make Japanese exports competitive in international markets as it is still higher than what it was five years ago, hurting exporters' profits. 

Who benefits? Using a macro lens, it's a lose-lose situation for all the stakeholders and it is just like adding fuel to fire (further exacerbating the economic crisis). Using the micro-lens, South Korea seems to be the winner in the short run. Its giants are improvising their products, both automobiles and electronics, and capturing market share in world markets. 

It can't be said that the Japanese are in a recession, unless officially announced. However, the facts and figures do not show a progressive image either.