Global market, at present is depicting a continuous fall in the prices of crude oil as well as other commodities. This reduction has been reported in various articles and columns, which however may not ring any bell, if viewed in isolation. In order to assimilate a composite situation, it is important to have a macro level glance at the events going on round the world. A SitREP, thus generated will surely raise the alarm in many minds.
Crude Oil
With the start of 21st century, crude prices continuously steeped in seven years and then dropped significantly around 2008. It was the time commonly termed as great recession, longest after the great depression. However, recovery was observed in subsequent years with fairly steady prices. In 2014, crude oil again assumed a downwards journey which seems to be non-stop, owing to removal of sanctions on Iran. The prices are predicted to go down further as low as touching the level of US$25 per barrel. The rumours seem to be true when crude prices are already touching US$28 per barrel. Further reduction may not be very far, as Iran intends to boost its oil export to 500 K barrel per day in six months and likely to touch 800K by the end of 2016. Iran intends to increase output to 5.7 million barrel a day by the end of 2020, a number almost twice current production. Iran’s determination to realize this ambition can result in a nightmare, come true.
Agricultural Commodities
Situation is not very different with regards to wheat and other agricultural commodities like rice, palm oil, sugar, etc. Varying trends in wheat prices, during a given period remarkably share the same trail as of crude oil. So is the similar pattern of other commodities. This downward drift is likely to smash hard on economy of the agriculture based countries
Wheat
Palm Oil
Rice
Sugar
Food
Gold
It is not difficult to correlate the trends depicted in these graphs. All commodities prices escalate around 2007 followed by a drop which is the time of Great Recession; the longest recession after Great Depression of 1929-33. Much was assumed and talked about the decline turning into a depression, but luckily that was limited within two years and economy started recovering. After an encouraging drive of more than four years, global economy stumbled again in 2014. Today most of the indices linger around numbers same as 2005.
One major difference between Great Recession and current drop is the sharpness of the curve. In Great Recession, the decline was sharp, however, in current situation the process is gradual yet steady. This drift forces one to contemplate, if the global economy is going into a depression or it is auto correcting itself, meaning thereby that it is going back to its original or actual worth. It is interesting to note that gold showed speedy growth against other commodities post great recession, however, is constantly losing its value since 2013. Can it be termed as a fore warning for impending serious economic setback, much sever in intensity as compared to past?
During the current scenario with sanctions being lifted from Iran and Saudi facing deficit for the first time in history, a persistent trend of decline in crude prices is indicated, which is likely to continue and prices are rightly perceived to remain low for a very long time. Crude oil below US$20, once thought to be a dream, seems becoming true. If crude goes down to pre-2000 what will be the fate of other commodities. It would not be wrong to say that those will also start a downhill journey.
Consequently, reduction in revenues and margins can be forecasted. If so, how will the corporate sector sustain production costs, as low raw material cost alone may not be able to provide sufficient margins? This may lead to a lack of disposable income available with rising joblessness. Retail market will also be affected and the general public with a set pattern of income, will be taken by surprise when major job cuts starts thrashing the market, which has already gone beyond 250,000 mark in 2015 for USA Oil & Gas Sector only. Situation may not be very different in other countries having major role in global business. Similarly, what will happen to the other industries is quite understandable.
The impact of recession on geo-political situation has never been constructive. Most of the time it has resulted in wars; may it be global, limited or civil. This is one way to restart the wheel of economy; destroy all and re-build. Is this the solution? Or is this time to consolidate and sustain assets including human, while building on past years savings.
