If you’ve been paying attention to stocks this year, you probably know that the markets have been alarmingly tumbling downward for a quite a while. All of the major market indices have seen large corrections, as investors worry about the health of the global economy. One the major developments in the news that’s stoking stock market declines is the dangerously low price of oil, which has erased trillions of dollars of paper wealth in just a few months.
When oil started declining, we celebrated a much needed break for the struggling American consumer. Now that we’re actually seeing what oil prices mean for the stock market, we’ve changed our minds. Many are concerned about the spillover effects of low oil prices that could potentially spell trouble for economies and private corporations around the world.
The declines in the stock market, partially because of the oil price crash, means we’re getting close to what investors call a bear market. That’s when the stock market gets caught in a cycle of lowering prices and mass sell-offs. In many cases, bear markets can be predictors of doom: six out of the last ten bear markets predicted a recession.
Recent events in the financial sphere are a stunning reversal of expectations. Just before Christmas, the economy seemed strong enough to weather the first interest rate hike in nearly ten years. Now, the Federal Reserve Chairman Janet Yellen is echoing what we’ve been seeing in the past month: “financial conditions in the United States have recently become less supportive of growth.” In plain English, that means the spill over from the stock market is starting to affect the real economy.
While China’s sputtering economic growth definitely remains an issue and is definitely weighing down the markets, oil is the elephant in the room. In an age where people are so enthusiastic about a world that’s moving beyond petroleum for its energy needs, we’re discovering that the financial system is extremely addicted to oil.
As John Mauldin of Mauldin Economics recently pointed out, the total value of all the world’s oil reserves is over $100 trillion less than it was just a year and a half ago. While that loss in wealth isn’t exactly real until every available barrel of oil on earth is sold, such a prominent decline affects companies and oil-producing countries’ creditworthiness. If companies can’t borrow while they’re not making money, many of them can’t survive the storm.
In an interconnected financial world, it’s easy to see how Wall Street can be the victim of collateral damage resulting from the crash in oil prices. Right now, it’s being widely reported that the financial sector has loaned a lot of money to energy companies, which are now in a death spiral and facing imminent bankruptcy. Investors will face losses as oil companies fail to pay their bills and close down.
The global economy is already sputtering, which means that low oil prices threaten to be the straw that broke the camel’s back. With growth already at historically low levels, it wouldn’t take much to knock us into yet another global recession. As we’re now discovering, the harsh truth about oil is that we’re very dependent on the resource and its profits.The future is not shaping up to be much different.
While Google’s parent company Alphabet recently overtook Apple was the world’s most valuable company, there’s one company that if publicly traded, could be worth a great deal more. Aramco, the Saudi Arabian state-owned oil company, could be worth in excess of $2.5 trillion dollars. That makes Alphabet’s valuation at a little less than 600 billion look like a paltry sum.
Like a junkie that’s in denial about his dependence, we have our heads in the sand about our reliance on the oil industry. No resource has produced more wealth than oil in the history of mankind. It’s taking a crash in gas prices to jolt us with a heaping dose of reality that the age of big oil is far from over.
David is the Editor of Bold. He's especially passionate about millennial economic empowerment. A former local news reporter, David is originally from the Little Havana area in Miami, and later became a pioneer resident of the Disney-inspired town of Celebration, Florida. David holds a Master’s in Public Policy from the Harvard Kennedy School.