Oil prices are coming down, and worries about what happens
next, fill the air. Gone is the jingoistic talk that had reached its high point a year ago
when most pundits saw the phenomenon as a triumph of American ingenuity over
the monopolistic tendencies of the OPEC cartel.
Instead of seeing the drop in the value of oil as an ongoing
price war between the OPEC producers of conventional oil, and the American
producers of shale oil – obtained with the use of the fracking technology – the
pundits attributed the drop in prices to the latter's effort to challenge the
supremacy of OPEC. They declared victory for their side, and thought that the
challenge ended then and there. But boy, they were wrong!
Now, a year later, the pundits are singing a more somber
tune. They see that many of the “frackers” are fracking no more. They see their
employees given the pink slips, and their equipment sold at fire sale prices.
They realize that hard times are here for the oil patch, and have no idea when
things may turn around.
With this side of the equation dissolving before their eyes,
the pundits have turned their attention to the other side of the equation; the
members of OPEC. Two editorials in this regard are worth looking at. The first
came under the title: “Saudi
Arabia 's Dollar Sense” and the subtitle:
“Tough choices now are better than a crisis of confidence later.” It was
published in the Wall Street Journal on January 14, 2016. The second came under
the title: “When Oil-Rich Countries Need More Cash,” published in the New York
Times on January 17, 2016.
The two editorials focus on Saudi Arabia , the biggest OPEC
producer, though the New York Times mentions the other players too, if only in
passing. In a nutshell, the concern of the Times's editors comes down to this:
“Falling oil revenues will increase the need for producers
to raise money by selling their investments … The sums involved are huge … Most
of the $7.2 trillion in sovereign-wealth funds is from nations that rely on oil
and gas to sustain their economies … they pulled out an estimated $100 billion
… the IMF warned that interest rates could be forced up if sovereign funds
began to sell their bond holdings. An official said that asset sales [and a run
on] those funds could cause large price movements.”
The editors of the Times see the problem getting worse, and
so they hint at a possible solution. We shall get to it in a moment. Meanwhile,
the editors of the Wall Street Journal look at the same subject but from a
different angle. They see a situation that is entirely different, thus hint at
something that is altogether different. Here, in a nutshell, is what they say:
“Kudos to Riyadh for sticking
to its smart, maintaining the riyal at 3.75 to the dollar … Investors have
speculated that Riyadh
might be forced to abandon the peg. The immediate problem is fiscal, with the
budget deficit hitting some 15% of gross domestic product … important are the
fiscal reforms the government is undertaking. The 2016 budget cuts spending by
14% compared to 2015.”
In other words, when the deficit reached 15%, the Saudis cut
spending by a comparable 14%. The WSJ editors saw wisdom in this, and responded
by congratulating the Saudis for “Riyadh 's
willingness to make cuts and reassure investors.” They explain: “This entails
tough choices, such as reductions in subsidies and delays in public works ...
Pain from reforms is more bearable than instability from lost investor
confidence in a devaluation … it's a relief when a government resists
devaluation in favor of stable money and domestic reform.” Who can argue
against that?
Now to the possible solution that's hinted at by the editors
of the New York Times. First they complain that the Saudis and the Russians
maintain their market share by flooding the world with cheap oil. They go on to
explain: “Those dynamics are unfolding without the transparency that investors
and policy makers need … efforts to create disclosure rules on sovereign wealth
funds have had limited success … financial regulators opted not to impose
heightened standards on asset managers that handle sovereign wealth, thus
precluding the chance to monitor the funds by monitoring their managers.”
It looks like the editors of the Wall Street Journal know
something in business and investment that the editors of the New York Times do
not. It is that serious long time investors do not need frequent minutia
information to make good investment decisions. They look at a long time
strategy such as the one devised by the Saudis and feel comfortable with it.
They like the stability it brings to the market, thus bet on it because they
want their portfolio to be handled by stable hands, operating in a stable
market reflecting a stable economy.
On the other hand, fast-buck artists like the split-second
high frequency traders who speculate on the minute by minute movement of
stocks, are the ones who need a continuous stream of minutia information to
beat everyone else at getting into a stock and out of it before the others have
had the time to digest the information.
They do not care about the economy because what they need to
make a profit is a market that's undergoing large swings in prices. They
interact with it and cause the bubbles that lead to crashes and ultimately to
economic recessions.