Although I did not put up a Christmas tree this year, somehow I feel more festive than ever. My family has been seeing a lot of relatives lately and we are travelling to beaches and mountains to be together during this holiday season.
I usually enjoy writing a year-end column, not only because I can write it in places away from the city, but also because it is the time when I get to reflect on what has happened and to think about the future.
The coming Year of the Sheep will no doubt be an interesting one, filled with a lot of uncertainties. Collapsing oil prices are a new wild card that has just been introduced into an already weak global economy — a development that likely will shape what happen in 2015.
Looking back, oil prices for much of the past decade have been high — at about US$100 per barrel since 2010 — largely because of rising oil consumption in countries such as China and geopolitical conflicts in major oil nations. As oil production was tight compared to high demand, prices increased.
But that has changed. Oil prices have plunged since mid-2014 from $115 per barrel to around $60 in December due to a number of factors. On the supply side, the conflict in Libya was slowly easing and oil production and exports were resuming, Iraqi crude production was more than expected, and Russia and Saudi Arabia kept output levels high despite the weakening price outlook. Companies in the United States and Canada has also been exploring for new crude. Improved technology has made extracting oil by "fracking" economically viable in the US, leading to a boom.
At the same time as output started rising, however, demand for oil in Europe, Asia and the US began declining, due to weakening growth and improving energy efficiency. These negative factors have been reinforced by recent strategic decision by Opec not to cut back output and instead try to protect its threatened market share.
To be fair, falling oil prices have been a piece of good news for consumers and airlines, among others. Low oil prices also are seen by many governments as positive for growth as they lower costs to businesses and consumers, encouraging them to invest and spend more.
Looking deeper, however, there are several possible dire consequences from cheap oil, some of which have already begun to appear.
For a start, not everyone benefits from plummeting oil prices. The big losers are companies in oil-related businesses. In Thailand, we have seen shares of PTT and PTTEP becoming some of the worst performers of the year on a bourse that is heavily weighted toward energy stocks. Elsewhere in the world, exploration companies have also fallen sharply, leading to plunges in many stock markets.
The big loser nations include petro-economies such as Venezuela and Russia. Russia's oil revenues make up 45% of the government budget, and the sharp fall on oil prices has caused the rouble to collapse. Its ailing economy is estimated to shrink much more than previously anticipated in 2015.
In Venezuela, there is growing concern that the oil crash could cause the country to default since oil accounts for 95% of its export earnings. The economy is set to shrink 3% this year and will continue to shrink in 2015.
Next, all commodities, not just oil, are hard hit when there is a sustained oil price decline. The Bloomberg Index of 22 basic commodities, for example, has recently fallen to a five-year low, eroding investors' confidence in emerging markets.
Third, global oil deflation means a rising US dollar, and the corresponding decline in the currencies of emerging economies, particularly those dependent on oil exports. Even non-oil, but commodity-heavy, exporting countries such as Brazil and Australia have experienced significant currency depreciation since oil prices kept falling.
Fourth, a sharp decline in currency values could lead to capital flight from emerging markets. Investors would dump those currencies, buy dollars and invest in US assets. The capital flight is reflected in emerging stock market declines and a rise in government bond interest rates. Flows of foreign direct investment into these countries will also slow. As a result, capital as well as credit could dry up.
Fifth, falling oil prices could further push already near-zero inflation rates to deflationary levels, especially in Japan and the euro zone. If a dropping oil price pushes these countries into deflation, central banks probably have reasons to inject even more money into their financial systems, contributing more to financial asset bubbles.
Sixth, deflation produces a negative psychological effect on consumers and businesses. While consumers might like falling prices, they tend to put off spending in hopes prices will fall further, which in turn leads to even lower prices. For businesses, uncertainty about how far prices for their products may fall by the time they bring them to market could make companies give up on additional investment, causing economic activity to become even weaker.
Although the consequences of cheap oil probably will make it to the top of the list of uncertainties next year, it already has provided a holiday gift for me and my family. This year, we have chosen to drive on our holiday rather than fly like we used to do (after all the price of plane ticket has not got any cheaper). It turns out to have been a good decision and a really fun driving experience. I hope you also enjoy the benefits of cheap oil while they last. Have a Merry Christmas and Happy New Year 2015!
Dr Tientip Subhanij holds a PhD in economics from the University of Cambridge, and currently has a career in banking as well as academia. She can be reached at tien201@yahoo.com