Some Consequences of the Oil Crash

The corollary of the oil crash wealth transfer from producers to oil consumers is  a conversion of  savings to consumption. The chatter about today’s market weakness, for example, is that sovereign wealth funds from the oil producing countries are liquidating financial assets.

This raises an interesting question: as petrodollars come out and flows to financial markets are reduced, shrinking the pool of global liquidity, and as the real income of oil consumers increase, will the net result be marginally weaker financial markets and stronger global economic growth?

Of course, the windfall to oil consumers could be saved and recycled back into financial markets, but this is without precedent.   The conventional wisdom is that the windfall savings will be spent.  The transition to lower oil prices is also creating volatility as evidenced by today’s market decline.  Stay tuned

Dec10_Oil

(click here if chart is not observable)

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4 Responses to Some Consequences of the Oil Crash

  1. BDL says:

    From the article: “Of course, the windfall to oil consumers could be saved and recycled back into financial markets, but this is without strong historical precedence.”

    Isn’t this how it works? Consumers spend, producers produce, and profit is realized, investors invest (recycled back into financial markets).

  2. macromon says:

    Good points, BDL. Ultimately, excluding leverage, savings are the mother’s milk of financial markets — private (Income – consumption), corporate (profits), and public (fiscal surpluses).

  3. Ted Shepherd says:

    “precedence” means priority; “precedent” means example; “historical precedence” means what?

    precedence — the condition of being considered more important than someone or something else; priority in importance, order, or rank.
    synonyms: priority, rank, seniority, superiority, primacy, preeminence, eminence

    precedent — an earlier event or action that is regarded as an example or guide to be considered in subsequent similar circumstances.
    synonyms: model, exemplar, example, pattern,

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