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Cheap Oil: Why Is It Bad News?

By Shlomo Maital

 cheap oil

 

   All too often, economic analysis seems to many like a good news/bad news joke. No economic news is ever completely happy, is it?   Take for instance oil prices. The price of oil has fallen below $30, and with Iran about to add millions of barrels to the excess supply every day, it looks like the price of oil will remain low for some time.  

   So this is good news, right? Cheaper gasoline, more discretionary income to spend, cheaper energy prices, and indirectly, cheaper goods and services… all good news. Because, when the past oil shocks (1973/4, 1978/9) zapped oil prices way up, the result was recession. So the opposite should cause…boom?   Right?

   If so, then why have global financial markets reacted very negatively to the oil price fall. Why is the rule of thumb – a 10 % fall in oil prices boosts GDP growth by 0.1 to 0.5 points – not longer true?   Why have global stocks fallen sharply?

   Note that the cause of the current oil glut is clear – Saudi Arabia. Its Minister of Oil (acting under the aegis of King Salman, young and highly pro-active) chose to take on Saudi’s enemies, Iran and to some degree Russia, by engaging in an oil price war and bashing prices down. Saudi Arabia can do this, because it is by far the world’s low cost oil producer. It can still make money when oil is $30, unlike Russia, Iran and most other nations. And $30 oil can kill a lot of American oil production, through fracking, and reduce competition in the long run.  Saudi Arabia though is suffering too, and the Oil Minister may yet lose his job.

   Collapsing oil prices seem to be taken by the world as bad news, not good, because: * they will increase instability in an already unstable world, in countries like Venezuela and the Gulf States; * oil producers are slashing their spending and investment, especially Russia, as oil revenues collapse; * many investment projects involving energy exploration are now on hold; * emerging market corporate debt of an added $650 billion was in oil and commodity industries; that debt is now much more risky; * Higher risk aversion to energy firms has spread to other parts of the market and other industries as well. * real interest rates are at near zero and there is no room to slash them lower.

     There are some winners. E.g., India, China, South Korea. But, notes The Economist, with the world still trying to dig itself out of the 2008 financial crisis hole, “the world could yet be laid low by an oil monster on the prowl.”

The most distressing aspect of the fall in global equities, due to cheap oil, is that it signals who really matters in the world. Big Oil, big capital, tycoons, the 0.01 per cent…THEY matter and they are the ones who are hurting. The rest of us 99.99?  Well, we benefit from lower oil prices… but since we are not players in global money, we don’t really count. 

Ebola — Fact vs Fiction

By Shlomo Maital

ebola

As a would-be journalist, I’ve followed closely how the media report on the Ebola virus epidemic in Africa.   America’s NPR (National Public Radio) is excellent – but even NPR has spread hysteria and has reported very badly on the issue.   There is something about this deadly little virus that kills half the people it afflicts, that frightens people. And the media play into these fears, by amplifying them. Shame on them.

The Economist rides to the rescue. As always it brings us the truth, with the facts well explained.   In the Oct. 18 issue, here is what The Economist explains:

  • The number of infections (in West Africa – mainly Sierra Leone, Guinea and Liberia) is doubling every 2-4 weeks.   Meanwhile, though, Senegal and Nigeria have been declared ebola free. So it is possible to stamp it out.
  • If something doubles every, say, 3 weeks,   then in 10 doublings (30 weeks, or about half a year), it is 1,024 times greater.   So if 10,000 people have Ebola virus today in West Africa, 10 million will have it in half a year. This is why it is so urgent to come to the rescue of these three countries.
  • If the West does wake up and send help, the goal is simple: Get the infectious rate down, in West Africa,  from 1.5 to 2.2 persons per infected person (i.e. every person who has Ebola infects 1.5 to 2.2 other persons, today), to less than 1.   If this ratio, known as Ro, is less than one, then the power of compounding works to our favor.   Soon, Ebola disappears.     You can only get the Ro number down by having more hospitals, more trained health workers, faster medical care, etc.   Get people infected to quarantine quickly.  This is done instantly in the West,  but West Africa does not have the means. 
  • This is not a Western problem YET.   The West has a moral obligation to help West Africa, whose economies have been devastated.   But it WILL be a Western problem, if a half year goes by and the Ro remains at around 2. Then the Ebola will simply not be capable of being stamped out.
  • Why is Ebola so fatal and so dangerous? Because it is fiendishly clever, even though of course it does not have a brain. Ebola virus invades a cell, and makes it produce more viruses instead of the cell’s own DNA. Ebola has sugars on the outside coating of the virus, making it tough for the body’s immune system to attack it (antibodies stick to the glycoprotein instead of to the virus). The immune cells that the virus attacks race to the spleen, liver and lymph nodes and thus carry the infection there. Soon, the body over-reacts, and blood vessel walls become leaky, organs fail and the body goes into shock. President Obama has sent 3,000 U.S. soldiers to help Liberia. Much more is needed. Europe, of course, is sound asleep. And a lot of the money promised to   West Africa remains just that – a promise.   Unless the rich countries wake up, they will find themselves dealing with a problem that is one hundred times harder to solve.

 

  • All this – from a tiny virus!   How did it get so smart? It evolved – nature’s accidents created viruses that survive to procreate.

Blog entries written by Prof. Shlomo Maital

Shlomo Maital

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