Lowered Crude Oil Prices Not Fueling Global Economy

Lowered Crude Oil Prices Not Fueling Global Economy

$USO, $OIL, $UGA, $CS

Remember when lower Crude Oil prices were hailed as a booster for global growth.

The movement of wealth from energy producers, which often stow away Oil revenue in sovereign wealth funds, to consumers, who spend a far larger portion of their income was thought to be a positive for economic activity.

But strategists at Credit Suisse (NYSE:CS) believe that the global economy has seen only darkness from lower Crude Oil, not the Sunshine that follows.

“The fall in the oil price was considered by many investors, and ourselves, to be a significant positive for global GDP growth,” a team led by CS’ global equity strategist Andrew Garthwaite admitted.

The net effect of this development, according to the calculations, has turned out to be a 0.2% hit to the global economy.

The negative effects of lower Crude Oil, namely the large-scale cuts to CAPEX (capital expenditures) are having a large and immediate impact on global GDP (gross domestic product).

“The problem is that commodity-related capex accounts for circa 30% of global CAPEX (with oil capex down 13 percent and mining capex down 31 percent in the past 12 months),” wrote the strategists, “and thus the fall in US and global commodity CAPEX and Opex has taken at least circa 0.8% off US GDP growth in 1-H of Y 2015 and circa 1% off global GDP growth over the last year.”

Employment in Crude Oil and its related industries has declined by roughly 8% since October 2014, with initial jobless claims in North Dakota, a prime beneficiary of the shale Oil revolution, at extremely elevated levels.

During this frame, average hourly wages for those employed in Oil & Gas extraction shrank nearly 10% after growing at a robust clip in the prior 2 years. And the payouts to investors who own Oil stocks have also been cut, which Credit Suisse deems to be a modest negative for household income.

“A fall in CAPEX brings with it a fall in direct employment and earnings (total payroll income in the US energy sector is down by 18% since November last year, for example), as well as 2nd-round effects on other industries servicing the CAPEX process, from machinery producers to catering and hotels,” the team wrote.

The team also found that the declines in capital spending have much less of a front-loaded shock on growth than in the 1980’s, the decade in which we last saw a supply-driven dive in Crude Oil prices:

“As a result, even once the Oil price has decisively troughed, the lag in both cutting (and re-starting) CAPEX projects is such that CAPEX could remain a drag on GDP for a number of quarters,” wrote Mr. Garthwaite’s Team.

On the other side, the positive effects for consumers have been slow to show up, best seen through the rise in the percentage of income consumers elect to save.

This rise in savings ratio in the US, Japan, and continental Europe speaks to concern about the how long these lower gasoline prices will hold.

If households believe the relief at the pump is temporary, they’re less likely to deploy those funds in more discretionary areas. Mr. Garthwaite and his Team note that consumers are coming around to the notion that lower Crude Oil prices might be a permanent development and are loosening their purse strings.

As such, Credit Suisse maintains that lower Crude Oil prices will eventually prove to be a net benefit for global growth that thanks to the transfer of wealth to entities with a higher marginal propensity to consume, as well as the prospect for more accommodative fiscal and monetary policy linked to softness in Crude Oil.

Stay tuned…

HeffX-LTN

Paul Ebeling

The post Lowered Crude Oil Prices Not Fueling Global Economy appeared first on Live Trading News.