Memo to the financial markets: Cheap oil is great

Wall Street insists that falling oil prices are bad news for the global economy. Sindicatum Sustainable Resources chief executive officer Assaad Razzouk debunks these myths.

Exhibitionist more than ever, Wall Street is loudly proclaiming, principally through a painful exercise of financial self-flagellation, that falling oil prices are bad news for the economy and for the world.

Plodding through an antiquated playbook, the markets insist falling oil prices must indicate global economic weakness, because they “always do” and because investors, long oil and romanticising tales of cowboys drilling for oil, are losing money.

It’s time, however, to throw in the bin of investment history a number of causal inferences that no longer work at the dawn of the post-oil energy era.

1. “Global growth slows when oil prices go down”

This is just plain wrong.

Most of us are consumers of oil, not producers. With oil down 80 per cent or so from its highs, we are enjoying a global liquidity boost equivalent to a massive Quantitative Easing (QE) program worth some $3 trillion.

Citizens and businesses everywhere benefit, through lower petrol prices at the pump and lower energy bills.

All the countries that are net consumers of oil also benefit. And that’s pretty much the entire world. It includes the major emerging economies of China, Indonesia, Thailand, the Philippines and India, as well as the United States, the European Union and Japan, and many others.

A lower fuel imports bill improves governments’ budgets and allows them to move to cut wasteful fossil fuel subsidies while raising spending on sectors such as health, education and infrastructure.

There will be losers as well, including Saudi Arabia, Nigeria, Russia and Venezuela, all heavily reliant on revenues from the export of oil. But their economies aren’t big enough to materially affect global growth.

2. “The stock market should go down when oil prices go down”

No, it shouldn’t.

Yes, low oil is painful for some companies shedding thousands of jobs and cancelling hundreds of billions worth of projects. It’s also painful for oil-producing countries who have a lot less money to spend.

But what low oil mainly does is exposing the financing practices of banks talking about climate risks yet financing oil, gas and coal without pricing the very same climate risks in. As in any market, it’s up to investors to adapt to reality, not the other way around.

Markets, while punishing reckless exposure to oil, should be simultaneously cheering the emerging green economy: Electric car and bus manufacturers; battery technologies; clean technologies; renewable energy businesses; manufacturers of solar panels, wind turbines and their associated technologies; green buildings; copper producers (the transition to a clean energy world is likely “paved in copper“); and many more.

Furthermore, since 195 countries at the UN summit in Paris announced, loudly and clearly, that the oil era has entered terminal decline, those oil and gas companies that cease exploration, sell existing reserves quickly and distribute their cash to investors should be rewarded by the markets.

Oil prices are indeed falling for the right reasons: We will soon be drowning in even more oil as electric cars and solar power pursue their inexorable advance under the watchful eyes of a public overwhelmingly committed to a cleaner, safer world. We are also already adding more clean power capacity each year than dirtier fossil fuel based power capacity - and the trend is accelerating.

After an initial volatile phase, the stock market should go up, not down, as oil becomes cheaper: A shrinking fossil fuel sector will be gradually replaced by rapidly growing green and clean alternatives, while the $3 trillion QE will re-energise the global economy.

3. “China’s slowdown is a huge concern”

No it’s not.

There is no evidence of a Chinese collapse. In the real world, China continues to add a G20-sized economy every year (about the size of Switzerland, Saudi Arabia or Turkey) while its fuel bill is dropping like a stone.

Furthermore, purring beneath the surface is a renewable energy engine which according to the International Renewable Energy Agency should boost economic growth by as much as 1.1 per cent by 2030, a massive $1.3 trillion gain. Alongside it, 15.2 million jobs will be created in the sector.

China should capture approximately one third of these benefits: In 2015, for example, China saw clean energy investments of $110.5 billion, a third of the world’s total. Its dominant market share is unlikely to change much over the next few years.

Oil price volatility also helps bring energy security into sharper focus in China and elsewhere. If you are producing energy in your backyard from plentiful, free resources such as the sun and the wind, why would you pay much at all for a health-damaging product, at the source of major geopolitical tensions, expensively transported to the consumer while it leaks toxic methane gas every step of the way? Energy security concerns will increasingly drive more investment in clean energy and less demand for oil.

As the curtain falls on the age of fossil fuels, it’s only a matter of time before the financial markets realise that low oil means all is great out there.

Assaad Razzouk is chief executive officer, Sindicatum Sustainable Resources. This post is republished from Huffington Post with permission.

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