One of the fascinating questions thrown up by the plunge in oil prices is whether, if the current prices are sustained, they will result in a reversal of the traditional flows of capital from oil-exporting countries.
It is a question which has implications for liquidity, volatility and prices in global asset markets, both financial and real.
In a global economic environment where the key central banks are more concerned about deflation than inflation, the speed and severity of the decline in energy prices also adds a new dimension to policy considerations that might also have some financial market consequences.
Given that the best guesstimate among investment banks is that the oil exporters have sovereign wealth fund assets of something around $US5 trillion and have pumped around $US500 billion a year in to US financial markets in the past, a reversal of the traditional flows from energy exporters could have significant impacts.
The change in fortunes of oil exporters has been swift and substantial. According to the US Energy Information Administration members of OPEC earned about $US700bn in revenue from net oil exports last year.
That was about $US121bn less than in 2013 and the lowest level of revenues since 2010. Brent crude averaged almost $US100 a barrel last year but is now trading around $US50 a barrel.
The impact on OPEC’s members, if current prices are sustained, will be far more profound.
The EIA expects their revenues to fall 46 per cent to $US446bn this year, $US374bn less than in 2013. But that’s based on an average price of $US68 a barrel. The numbers would be far larger if non-OPEC energy exporters were included.
All of the OPEC countries would confront fiscal deficits if the oil price were to remain at today’s levels. The Saudis recently framed their budget for 2015 and, based on an average oil price of about $US60 a barrel, they projected their largest-ever deficit of $US38.6bn.
While that’s not a particular issue for the Saudis, given their massive reserves, it is -- along with the crisis-like position of Russia -- illustrative of the issues confronting the oil exporters.
For the first time in several decades OPEC and other oil exporters could be repatriating rather than exporting capital and liquidity.
Much of Saudi Arabia’s wealth is invested in US Treasuries and high-grade corporate bonds but petrodollars generally are spread across the asset classes, including such disparate assets as football clubs, landmark properties in the major western capitals and (more substantially) conventional investments like equities, bonds and gold. There’s also considerable capital tied up in illiquid holdings in infrastructure.
Separate to the drying up of capital flows out of oil exporters could be the effects if they begin liquidating their foreign holdings, which would exaggerate their impact on currencies and interest rates in some markets. The dive in the oil price has already produced contagion effects in high-yield debt markets, equity markets and currency markets.
The grim tidings for energy exporters are, of course, matched by the benefits to energy importers.
There is a substantial wealth transfer occurring, one that could add to global economic growth rates as income is transferred from oil producers with a propensity to save and invest to economies where the benefits will show up in lower costs and increased incomes.
The concern about the impact on financial markets’ liquidity, however, relates to the fact that the income transfers aren’t matching. The capital extracted from asset markets (financial and real) isn’t recycled into them but flows through to businesses and consumers in oil-importing economies via lower fuel costs.
For four years, the oil price was reasonably stable above $US100 a barrel and then it crashed, very quickly. For oil exporters, importers and financial markets, there could be significant repercussions if prices remain at or around their current levels for a sustained period. At the very least it has added a new layer of uncertainty to what were already very uncertain and volatile global economic and financial market environments.