Rising oil prices may bail out Canada but precipitate a global financial calamity; there’s a reason Trump is screaming at OPEC to crank it up


Suppose you were a sort of financial derelict that spent what you wanted, and ran up huge debt. You had options to reduce the debt burden, such as collect money that was owed you, or sell off some things; but you were having a good time and that stuff seems like a lot of work. Eventually you run out of hiding places and go bankrupt, then claw your way out, then it’s party time again. But old habits die hard, and the cycle repeats. At some point, without resorting to criminality, it’s going to be hard to keep clawing your way out, and the rest of life gets harder and harder. With a few near-death financial experiences on your resume, try getting a mortgage and you won’t see the same friendly faces as in the bank commercials.

On the other hand, if you’re a country and live that carefree lifestyle, well no problem at all. Hello, Italy. Hello, Greece. Hello, Argentina.

These countries are not particularly responsible with the credit card; Argentina for example has defaulted on debt 7 times in its history – kind of a generational thing like a total solar eclipse that comes around periodically but reliably. Or Greece, which has been a dead man walking, financially speaking, for a decade, and it’s one of the ones that couldn’t even be bothered to collect back taxes from its nose-thumbing citizens. Italy is somewhere in the middle; a huge debt load, huge underground economy, and, well, they don’t really find the subject all that interesting. Their interest in governance is best summed up by the infinite presence of Silvio Berlusconi, a permanent near-criminal party-boy political leader. When faced with a choice, Italians prefer to talk about whether the rear end of the new Ferrari looks right.

What does that have to do with anything, particularly oil? Well, a bit of history is in order to see the potential looming chaos. The world dug itself out of the 2008 financial crisis with some economic sleight of hand, the likes of which the world has never seen before. Mountains of money appeared out of nowhere, buying up bad debt, moldy houses, and whatever else was required in order to keep the global ship afloat. It was an extraordinary display of creating what financial types call liquidity, a word that is the cousin of one that we became familiar with here in the energy business over the past few years – to liquidate.

But the debt didn’t all just disappear, and furthermore, the only way the world was going to get back on track was if there was enough economic growth globally to save the day. To ensure that, governments everywhere slashed interest rates to the point of absurdity, flooding the system with cheap money to get people and businesses to borrow and spend. And absurd isn’t an exaggeration; some European countries still have negative interest rates. That’s right, lend these countries money and you’ll have to pay them for the privilege. That is how desperate these countries are to kick start activity.

The financial deadbeats above get to enjoy the party too. Greece can issue 2 year bonds and pay only 1.44 percent interest. Italy’s 2-year rate is 0.82 percent. Argentina, who is in financial trouble yet again, issued 100 year bonds a year ago at 7.9 percent. If their default eclipses return on schedule, the country will default on those probably three times in their 100-year life. But this cheap debt is seen as globally necessary to boost economies as much as possible. Who buys this crap is beyond me, but that too is one of the wonders of the global economic recovery.

As you can see, central banks are dead serious about having cheap debt, and they are also dead serious about how scared they are of high oil prices. Because oil is a part of virtually every cost structure on earth, rising oil prices will at some point put a damper on economic growth, and all those trillions of cheap-debt dollars will have been for nought. High oil prices are, in effect, no different than high interest rates or high taxes; they are another obstacle for businesses trying to get ahead (businesses outside of oil producers, that is).

Trump knows this as well as anyone. A large part of his economic miracle is due to the ridiculously low energy prices he’s enjoyed thus far in his presidency, both for oil and natural gas.

If we see oil over a hundred dollars again (which is entirely possible, with Venezuela collapsing, a lack of proper global exploration budgets, and omnipresent mideast tensions), all those global governments that have extended themselves to kingdom come in a singular attempt to grow economies are going to be in big trouble. The difference between now and 2008 though is that the governments have no recession fighting weapons in the armoury anymore; the primary one of those, lowering interest rates, is not possible for most nations.

That is also one likely reason that the US central bank has been raising interest rates, a move which runs counter to Trump’s massive efforts to generate economic growth. The US central bank knows it needs a tool in its tool kit to fight the next recession, even if it’s a dull one.

Ironically, despite our best efforts, this could work out well for Canada. The Canadian dollar is not exactly flying high relative to our best trading partner (who remains our best trading partner through, I don’t know, beaten spouse syndrome I suppose), and, though some groups are trying hard to deny it, oil remains massively relevant to Canada’s economy. That old bumper sticker that was once popular in Alberta, a prayer for just one more boom and a promise not to piss it away this time, is actually just as relevant to Canada as a whole now. The situation for Canada then is probably slightly better than a lot of nations addicted to cheap debt, who are now facing an uncertain global trade picture, and the likelihood of vastly higher interest rates at some point when the market is permitted to once again price debt the way it should be priced.

Some might wonder what might make oil prices go up so substantially, when the entire world’s media stream has for several years now ensured us the opposite. That malarkey was the result of the cat-and-the-laser-pointer syndrome, where a simple beast is captivated by the shiny object, failing to recognize that it is not just unreal but a distracting sideshow. That laser-light for humans has been the US shale juggernaut, not just the drilling frenzy but the media frenzy. The shale revolution is not going to solve the world’s need for petroleum, not by a long shot. As the world wakes up to this fact, oil prices may move markedly higher, and, like 2008, all hell might break loose again.

But who cares, it’s Stampede!

Read more insightful analysis from Terry Etam here. To reach Terry, click here

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