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523: Oil Prices Crash to $55/bbl – impact for Property Investors

12-19-2014 team

Oil Crash:  There are some very interesting dynamics occurring in the oil-commodities sector that will help shape inflation and property investing expectation for the next few years. It’s important for property investors to understand the dynamics and ramification to protect their assets and seize on any property investing opportunities.

Market Share:  In November, Saudi Arabia with support from its neighbouring Arab friends UAE and Kuwait decided to pledge to keep their production rates stable and watch the price of oil drop to more market driven levels. They were not willing to give up market share and be the “swing producers” – either collectively or singularly. At the time, it was probably anticipated that oil prices would drop, but we think anyone’s been surprized how sharply oil prices have collapsed in the last 6 weeks.

Saudi Strategy:  So exactly why does Saudi Arabia and a few key allies decided to let the oil price drop so sharply? There are many intertwining explanations, any one or grouping of them could be the reason. Saudi wants to:

·         Put financial pressure on Iran – their regional competitor and about to develop enough high grade plutonium to make nuclear bombs

·         Put financial pressure on ISIS – help reduce financial support for their oil smuggling operations

·         Put financial pressure on Russia who have recently overtaken Saudi Arabia as number one oil producer in the world

·         Put financial pressure on higher cost producers like Iran, Nigeria, Russia and Venezuela – also not considered friends

·         Put financial pressure on the US shale oil fraccing companies – about 4 million bbls of extra oil supply has come on-line since 2009 from shale oil fraccing in North Dakota and Texas, with unit technical costs to produce of $40-$70/bbl

·         Put a stop to new green renewable energy sources that were just beginning to gain significant market share – e.g. solar, wind, ethanol – many of these projects will need to be cancelled

·         Take back market share from natural gas– that has slowly been eating into oils energy dominance – with new natural gas powered vehicles in the US

·         Send a signal to large capital intensive gas-LNG projects – that oil is again competitive – and clip the wings of their regional rival Qatar (the world’s largest LNG producer)

·         Work in cahoots and doing a deal with the US – that they both flood the market with oil and in return the US supplies military hardware and expertise to Saudi – to help defeat ISIS and secure the House of Saudi from its detractors, whilst hitting Russia (over Ukraine) and Iran (over their nuclear aspirations)

Weathering The Storm:  Because Saudi Arabia has such huge foreign reserves built up over the last five years at $100/bbl – it can weather the financial burden of $55/bbl oil even though their budget is based on $100/bbl. They may just use part of their dollar reserves to fund the price drop. In the long term, they would prove they are the number one oil player in the Middle East, clip the wings of Iran and Russia and get friendly with key customers in western Europe, China, Japan and USA.

It’s easy to imagine any of the above as being reasons – but if you take them all together and it’s certainly not difficult to see Saudi’s logic.

As we all know, the oil business tends to go in boom and bust cycles. This bust cycle seems to be engineered – and if it can hit the renewables and oil-shale fraccing business plus the people Saudi and USA least like, it could pave the way to stopping key projects for years, then create a supply constraint in about 2 years time that would then put Saudi back in control of OPEC – riding high again with steady $100+/bbl oil prices. It will immediately have a big impact on killing projects and confidence, and this would take years to return – something Saudi no doubt will be well aware of.

Analysis: Below is our unique analysis of the impact of the change in oil price in different countries finances. We have taken the net oil exports and imports of oil and calculated the annual revenue stream assuming $102/bbl for each major country in the world, and also all countries group into regions. Then we have assumed oil prices at $51/bbl - a halving - as has recently happened to mid December 2014. We have then calculated the net loss (red -ve) or gain (green +ve) for each country. Obviously the nations that import large quantities of oil gain, with those export large quantities losing revenue. 

The analysis shows that Saudi Arabia on an annualised basis would lose $-155.6 billion in export revenue. Russia would lose $-140 billion. USA would gain $144.7 billion. Iran would lose $-30.8 billion and Venezuela $-33 billion - large numbers for such small economies. China would gain $128 billion and Japan $82 billion. 

Looking a populations, this equates to giving a US citizen a tax break of ~ $480 per person per year, with Japan around $390 per person per year. As you can see, this stimulus is quite considerable and will benefit all oil importing nations moving into 2015. This should then feed through to property prices.      

Modelling:  We have also added each nation's population and GDP (2012$, around $100/bbl). We have also added the annual per capita in dollars (per person). If we then divide the loss-gain by the per capita, we get a % reduction or increase in per capita. This is a pretty good proxy for a fiscal tax stimulus (benefit) or fiscal tax burden (loss) per person. What is shows for example is that each Saudi citizen would long term see a 21% loss in their living standard. Each Libyan would see a massive -31% loss in living standards. However, each Chinese would see a +2% increase (like a 2% tax give away) and each South Korean would see a +4% increase. Based on this model, at $60/bbl - we would expect to see South Korean property prices to rise sharply in 2015.  

Country Oil Export-Import '000 bbl/day Surplus/Deficit $ Bln/year at $102/bbl Loss/Gain $ Bln/year at $51/bbl Population GDP IMF 2012 $ (Wiki) Per Capita $ IMF 2012 (Wiki) Per capita gain-loss $/year Proportional Gain/Loss
Middle East
Saudi Arabia 8359 311.2 -155.6 29,195,895 727,307 25,085 -5329     -21%
Iran 1658 61.7 -30.9 76,954,000 548,895 7,211 -401       -6%
United Arab Emirates 2952 109.9 -55.0 8,264,070 358,940 64,840 -6650     -10%
Kuwait 2627 97.8 -48.9 3,582,054 173,424 45,824 -13651     -30%
Iraq 2630 97.9 -49.0 33,330,000 212,501 6,305 -1469     -23%
Qatar 1752 65.2 -32.6 1,864,817 183,378 99,731 -17485     -18%
Russian Federation 7533 280.5 -140.2 143,400,000 2,021,960 14,247 -978     -7%
Norway 1484 55.2 -27.6 5,063,709 501,101 99,462 -5455      -5%
Kazakhstan 1544 57.5 -28.7 17,010,000 196,419 11,773 -1689     -14%
Denmark 1 0.0 0.0 5,605,836 313,637 56,202    -2       0%
Turkmenistan 97 3.6 -1.8 5,240,000 33,679 5,999 -343      -6%
Azerbaijan 772 28.7 -14.4 9,235,100 68,804 7,450 -1556     -21%
United Kingdom -676 -25.2 12.6 63,705,000 2,440,505 38,589 198       1%
Romania -99 -3.7 1.8 20,121,641 169,384 7,935 92       1%
Uzbekistan 30 1.1 -0.6 29,559,100 51,168 1,737 -19      -1%
Netherlands -871 -32.4 16.2 16,801,900 773,116 46,142 965       2%
Italy -1163 -43.3 21.6 59,704,082 2,014,079 33,115 362       1%
Spain -1200 -44.7 22.3 47,059,533 1,352,057 29,289 475       2%
France -1666 -62.0 31.0 63,886,000 2,608,699 41,141 486       1%
Germany -2405 -89.6 44.8 80,493,000 3,400,579 41,513 556       1%
Nigeria 2275 84.7 -42.4 173,615,000 268,708 1,631 -244     -15%
Algeria 1181 44.0 -22.0 37,900,000 207,794 5,694 -580     -10%
Libya 1303 48.5 -24.3 6,202,000 81,915 12,778 -3912     -31%
Egypt -51 -1.9 0.9 83,661,000 256,729 3,112 11         0%
North America      
Mexico 855 31.8 -15.9 117,409,830 1,177,116 10,247 -136       -1%
Canada 1761 65.6 -32.8 35,141,542 1,819,081 52,232 -933       -2%
USA -7772 -289.4 144.7 316,814,000 15,684,750 49,922 457        1%
South America      
Venezuela 1778 66.2 -33.1 28,946,101 382,424 12,956 -1144       -9%
Ecuador 286 10.6 -5.3 15,586,600 80,927 5,311 -341       -6%
Colombia 739 27.5 -13.7 47,265,000 366,020 7,855 -291       -4%
Argentina -6 -0.2 0.1 40,117,096 474,954 11,576 3        0%
Brazil -948 -35.3 17.6 193,946,886 2,395,968 12,079 91       1%
Peru -127 -4.7 2.4 30,475,144 199,003 6,530 78       1%
Asia Pacific        
Vietnam 350 13.0 -6.5 88,780,000 138,071 1,528 -73       -5%
Malaysia -109 -4.0 2.0 29,903,000 303,527 10,304 68        1%
Brunei 126 4.7 -2.3 393,162 16,628 41,703 -5951      -14%
Indonesia -801 -29.8 14.9 237,641,326 878,198 3,910 63        2%
Australia -631 -23.5 11.7 22,906,400 1,541,797 67,723 513        1%
Thailand -764 -28.5 14.2 65,926,261 365,564 5,678 216        4%
India -2888 -107.5 53.8 1,242,176,456 1,824,832 1,492 43        3%
South Korea -2460 -91.6 45.8 50,219,669 1,155,872 23,113 912        4%
Japan -4414 -164.3 82.2 127,350,000 5,963,969 46,736 645        1%
China -6874 -255.9 128.0 1,354,040,000 8,227,037 6,076 95        2%
Total For Regions
Asia Pacific -22693 -845 422
Africa 5539 206 -103
Middle East 19911 741 -371
North America -5156 -192 96
S. & Cent. America 359 13 -7
Europe & Eurasia -1476 -55 27 analysis   19 Dec 2014


Impact:  For Europe and US property investors, its broadly very good news.  In all “average” areas it will create a big boost to real estate prices because:

·         General inflation will crash meaning the Fed and Bank of England and European Banks will not be able to put up interest rates

·         GDP growth should be stimulated is most countries, particularly countries with high oil import bills like Spain, Italy, Greece and France – plus the USA

·         As the global economy was slowing down – it will boost overall growth except in major oil exporting nations

·         Property prices in oil intensive areas like New York, California and most of NE USA will rise and be supported

·         The increase consumer spending, particularly in countries with low government petrol-gasoline taxes like the USA – will stimulate consumer spending and GDP growth  

Crash On The Cards: However there will be some places were property prices either decline sharply or crash – you will see this in the next 6-12 month

·         UK – Aberdeen (jobs losses, North Sea oil production crash and total collapse of drilling and development activity)

·         UK – Prime London property >£5 mln (less Russian, Middle East and African oil money)

·         Norway – Oslo, all areas will be affected

·         Russia – depression, all areas will be affected – Moscow and St Petersburg property price crashes

·         Saudi Araba, Kuwait, Iran, UAE, Qatar, Bahrain, Iraq, Oman – property prices dropping sharply in $ dollar terms

·         Venezuela – long term depression with riots

·         Nigeria – destabilizing

·         Gabon – destabilizing

·         Equatorial Guiness – destabilizing

·         Angola – recession

·         Libya – continued turbulence and recession

·         Egypt – less money from Middle East partners – destabilizing

·         Australia – particularly Perth, Melbourne and mining-oil-gas producing areas

·         Canada – Calgary (jobs losses, big drop in activity, boom goes bust)

·         USA – Texas and North Dakota  (jobs losses, big drop in activity, boom goes bust)

·         Malaysia - Kuala Lumpur (jobs losses, drop in activity)

The low oil prices will give a big boost to the economy in

·         China – all areas particularly Shanghai

·         All Asia Pacific oil importing areas

·         Most European countries with high oil-gas import costs  (all countries except Russia and Norway)

Currency Turmoil

The Russian Rouble has crashed to about 55% of it’s value since early 2014 because of sanctions, the oil prices and the Ukraine war. It’s probably worth some analysis of currencies because this is likely play a key role in the next few years in regard to inflation expectations.

After the 2008 financial crash, the US Fed printed Trillions of dollars that were exported all around the world in an attempt to prop up and stabilize the global economy. This benefited emerging economies and also strengthened their currencies and lowered their inflation. However, as oil prices have now crash – we expect to see the currencies of major oil exporting nations to crash and with this, inflation will rise sharply. But we might also see large outflows of money from these emerging economies - that is then invested in real estate in safe haven cities like New York, Singapore and London. So as the currencies in places like Iran and Russia crash, we expect to see more wealthy Iranians and Russian’s buying expensive West End London properties despite higher stamp duty.

Essentially – the Trillions of dollars have got to come back one day and cause asset inflation in the developed countries. The assets most likely to explode in prices are high end real estate in major cities, art, wine and luxury goods. This happens when the super-rich elite families bail out of their emerging economies – their homelands – and shift into safe havens like New York and London.  


It seems most likely the US-Saudi axis will cause economic collapse in Russia, Venezuela and Iran – which is probably their plan. This is similar to 1986 when Regan and the House of Saudi manufactured the last massive oil price collapse that made Soviet oil uneconomic to export and directly led to collapse of the Soviet Union.  The unfortunate thing about the existing Saudi-US strategy  is that it had a high risk of making the heads of these countries coming out fighting – as political pressure grows, particularly in Russia and Iran. So do not be surprized to see both Russia and Iran starting regional wars or at least creating major escalations in tensions in 2015.

As they say, it starts with “trade wars” (or sanctions), then we have “currency wars” (in this instance in the form of a manufactured oil price crash), then “world wars” (military excursions).

US Dollar

A the  moment, everyone is thinking the US dollar is king – the safe haven – and indeed it’s a big turnaround since 2009 - it’s only been possibly because of oil-shale-fraccing, otherwise the US deficit would not have allowed the dollar to stay as king. But things can turn very quickly if a US financial contagion was to start, so don’t be surprized in due course to see the dollar decline sharply then further money printing as the US economy slows down.

In the meanwhile, all major oil importing nations will see massive financial benefits from the almost halving of oil prices and this should keep the global economy from spinning into recession in the next few months. Our only caveat to this, is that so often, an oil price crash has been the precursor to a global recession. It’s the market saying “there’s a major slowdown, lack of oil demand, recession on the horizon”.

But an example of the positive impact of an oil price crash is in 1986 when Saudi flooded the world with cheap oil driving oil from $25/bbl to $8/bbl, which helped create the boom in 1987-1989. Then again when oil prices crashed to $9/bbl in 1999 – this created a financial boom through to March 2000 and house price doubled in the UK from 1999 to 2005.

In the UK we have the following forces acting on the property prices in both directions;

Stimulates Property Prices

·         Inflation dropping to ~1%

·         Lowering mortgage rates

·         Very low interest rates 0.5% - likely to remain low

·         Sterling staying fairly strong

·         Stamp duty changes for properties <£800,000

·         Lack of housing supply

·         String rental demand

·         Levels of building dropping in the last 3 months

·         Reasonably good mortgage availability

·         Population boom, especially in London

·         Open porous borders allowing migrants from all countries to easily settle – in large part due to EU laws

·         Rising employment – six private sector jobs created for every one job lost in public sector

·         Nimbyism stifling building

·         GDP growth fairly robust

·         Oil prices dropping sharply  

Suppressing Property Prices

·         Political uncertainly – threat of a Labour majority or Coalition

·         Lack of affordability – high deposits required

·         Subdued wage inflation

·         High stamp duty on more expensive properties

·         Uncertainly in May 2015 Election outcome – SNP, UKIP, Labour, Tory, Lib-Dem outcomes

·         Uncertainty as to whether the UK will remain in the European Union

The bottom line is – if oil prices stay low and the Tories form the next government, property prices particularly in London and southern England should rise again sharply. But if Labour form the new government, we expect Sterling to decline, food-inflation to rise, interest rates to rise and property prices to stay suppressed or drop sharply in southern areas.

Property Investors:  For property investors, it really is critical to see who forms the new government before making any significant investments at this time. No-one trusts Labour on the economy. We expect the property market to stay fairly subdued through to May 2015 – until everyone can see the outcome of the Election. The low oil prices and stamp duty changes have probably done just enough to stop any significant property price declines before the Election, but if Labour get back in – they will immediately raise taxes, raise spending, raise indebtedness and increase the public sector - just like they always have done – with a Sterling crash -recession start by end 2015-2016.

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