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The Countries Suffering Most From Low Oil Prices

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The Countries Suffering Most From Low Oil Prices

As Warren Buffet says, “Only when the tide goes out do you discover who’s been swimming naked.”

And in 2014, when oil prices crashed and burned, the tide was gone – and it was shown that too many countries were relying on frothy oil revenues to balance out their trade deficits.

A Lingering Crisis

Fast forward to today, and low oil prices are still causing big problems for many countries. The above interactive visualization from the Council of Foreign Relations shows how the world economies most reliant on oil exports have fared since the 2014 crash.

The end results are not pretty – and even in 2016, there were 18 economies that had breakeven prices (based on spending on imports) that were above the average oil price for the year:

Country2016 Breakeven Price (Based on Imports)Difference from Avg. Oil Price
Libya$134.10-$91.29
Turkmenistan$132.00-$89.19
Colombia$102.30-$59.49
Algeria$101.10-$58.29
Bahrain$92.30-$49.49
Oman$86.80-$43.99
Chad$86.20-$43.39
Qatar$67.00-$24.19
Kazakhstan$64.10-$21.29
Gabon$60.50-$17.69
Trinidad & Tobago$60.20-$17.39
Brunei$58.50-$15.69
Venezuela$54.40-$11.59
Iraq$51.90-$9.09
Saudi Arabia$51.80-$8.99
Azerbaijan$50.90-$8.09
Angola$50.30-$7.49
Nigeria$43.50-$0.69

The oil price crash made many oil-reliant economies more fragile, and this fragility can be triggered in different ways. One interesting case study is Venezuela, which is currently embroiled in an ongoing economic, currency, and humanitarian crisis.

Bad Timing for Maduro

During the Hugo Chávez era, sky-high oil prices enabled fiscal and trade policies that subsidized Venezuelan life in many ways. That all changed in 2014, which was only one year after Nicolás Maduro took office.

Despite having largely the same policies as his predecessor, low oil prices have hammered the Venezuelan economy. Even with today’s prices, oil generates an estimated 95% of export revenues for the country. This has resulted in a disaster for the socialist nation, and Venezuela is now stuck with shortages in essential goods, crushing unemployment, a contracting economy, skyrocketing crime and murder rates, and even widespread malnutrition.

At the root of much of this, arguably, is an uncontrollable cycle of hyperinflation:

Venezuelan hyperinflation of the bolivar

With an economy that is a runaway train, the government prints more and more cash to try to maintain the status quo. This almost never works, and last year it even led us to publish a chart comparing Venezuelan hyperinflation with that of Weimar Germany.

According to DolarToday.com, a website that tracks the black market rate for Venezuelan currency, it takes 8,470 bolívars to buy US$1 today. Right before the oil crash this was closer to 65 bolívars.

A Lost Cause

While many oil dependent nations are working to diversify or ride out low oil prices in other ways, it seems unlikely that the crisis in Venezuela will be reversed anytime soon.

Here’s the full fiscal breakeven needed by OPEC producers, including Venezuela, to help normalize things:

Fiscal Breakeven

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has increasingly become more centralized. Here are the big flaws it has, as a result.

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The 7 Major Flaws of the Global Financial System

Since the invention of banking, the global financial system has become increasingly centralized.

In the modern system, central banks now control everything from interest rates to the issuance of currency, while government regulators, corporations, and intergovernmental organizations wield unparalleled influence at the top of this crucial food chain.

There is no doubt that this centralization has led to the creation of massive amounts of wealth, especially to those properly connected to the financial system. However, the same centralization has also arguably contributed to many global challenges and risks we face today.

Flaws of the Global Financial System

Today’s infographic comes to us from investment app Abra, and it highlights the seven major flaws of the global financial system, ranging from the lack of basic access to financial services to growing inequality.

1. Billions of people globally remain unbanked
To participate in the global financial sector, whether it is to make a digital payment or manage one’s wealth, one must have access to a bank account. However, 1.7 billion adults worldwide remain unbanked, having zero access to an account with a financial institution or a mobile money provider.

2. Global financial literacy remains low
For people to successfully use financial services and markets, they must have some degree of financial literacy. According to a recent global survey, just 1-in-3 people show an understanding of basic financial concepts, with most of these people living in high income economies.

Without an understanding of key concepts in finance, it makes it difficult for the majority of the population to make the right decisions – and to build wealth.

3. High intermediary costs and slow transactions
Once a person has access to financial services, sending and storing money should be inexpensive and fast.

However, just the opposite is true. Around the globe, the average cost of a remittance is 7.01% in fees per transaction – and when using banks, that rises to 10.53%. Even worse, these transactions can take days at a time, which seems quite unnecessary in today’s digital era.

4. Low trust in financial institutions and governments
The financial sector is the least trusted business sector globally, with only a 57% level of trust according to Edelman. Meanwhile, trust in governments is even lower, with only 40% trusting the U.S. government, and the global country average sitting at 47%.

5. Rising global inequality
In a centralized system, financial markets tend to be dominated by those who are best connected to them.

These are people who have:

  • Access to many financial opportunities and asset classes
  • Capital to deploy
  • Informational advantages
  • Access to financial expertise

In fact, according to recent data on global wealth concentration, the top 1% own 47% of all household wealth, while the top 10% hold roughly 85%.

On the other end of the spectrum, the vast majority of people have little to no financial assets to even start building wealth. Not only are many people living paycheck to paycheck – but they also don’t have access to assets that can create wealth, like stocks, bonds, mutual funds, or ETFs.

6. Currency manipulation and censorship
In a centralized system, countries have the power to manipulate and devalue fiat currencies, and this can have a devastating effect on markets and the lives of citizens.

In Venezuela, for example, the government has continually devalued its currency, creating runaway hyperinflation as a result. The last major currency manipulation in 2018 increased the price of a cup of coffee by over 772,400% in six months.

Further, centralized power also gives governments and financial institutions the ability to financially censor citizens, by taking actions such as freezing accounts, denying access to payment systems, removing funds from accounts, and denying the retrieval of funds during bank runs.

7. The build-up of systemic risk
Finally, centralization creates one final and important drawback.

With financial power concentrated with just a select few institutions, such as central banks and “too big too fail” companies, it means that one abject failure can decimate an entire system.

This happened in 2008 as U.S. subprime mortgages turned out to be an Achilles Heel for bank balance sheets, creating a ripple effect throughout the globe. Centralization means all eggs in one basket – and if that basket breaks it can possibly lead to the destruction of wealth on a large scale.

The Future of the Global Financial System?

The risks and drawbacks of centralization to the global financial system are well known, however there has never been much of a real alternative – until now.

With the proliferation of mobile phones and internet access, as well as the development of decentralization technologies like the blockchain, it may be possible to build an entirely new financial system.

But is the world ready?

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Chart of the Week

How Every Asset Class, Currency, and Sector Performed in 2018

Investors saw a sea of red in 2018 – here’s a visual recap of how markets performed, including the big winners and losers from a volatile year.

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We’re only a few days into 2019, but it appears markets have picked up exactly where they left off.

There is growing uncertainty and volatility almost everywhere, and individual events are starting to become catalysts for sell-offs or rallies. Whether it’s Apple’s recent profit warning or Fed chair Jerome Powell saying that he is “listening closely” to the markets, investors are taking cues from current events to figure out where the herd is grazing.

It’s hard to say where markets will head in 2019 – but before we get into the nitty-gritty of a new year, it’s worth taking one final look back at 2018 to see how it impacted investors.

How Markets Did in 2018

We’ll start with broad asset classes, including stocks, bonds, commodities, and cash:

Asset Classes in 2018
Note: Figures for equity markets are not including dividends

As you can see, it’s mostly a sea of red.

Cash turned out to be best option for the year, and several asset classes were crushed over the course of 2018, including crude oil and nearly all stocks. Despite this, large cap U.S. stocks (S&P 500) had no issues in outperforming equity alternatives, like smallcap stocks, foreign stocks, or emerging markets.

S&P 500 Sectors in 2018

Breaking down the S&P 500 further into its sectors, it’s clear that nearly every industry struggled simultaneously.

Energy (-20.5%) and Materials (-16.4%) sectors were the hardest hit, and even the Technology sector eventually capitulated by the end of the year. Amazingly, Apple was considered a $1 trillion company in August, but today the tech giant’s market capitalization has already dropped down to a measly $700 billion.

The one exception to the general trend in S&P 500 stocks was Healthcare, which posted 4.7% returns over the course of 2018. Companies like Merck, Eli Lilly, and Pfizer all saw their stocks grow by double-digits, and it’s possible the sector could stay strong in 2019 as the world continues to age.

Currencies in 2018

Lastly, here’s how major currency markets fared.

The U.S. dollar was the strongest major currency, and the Japanese yen had an impressive year as well. The Aussie dollar was routed, and now sits at 10-year lows.

Winners and Losers

Lastly, here’s an ad hoc list of some of the biggest winners and losers in 2018 – it includes some of the stocks and assets that saw notable gains or declines over the course of the year:

Winners and Losers in 2018

Interestingly, it was the finer things in life that outperformed most major asset classes. Both fine wine and fine art gained close to 10%, leaving most other indices behind in the dust.

AMD had a roller coaster year, finishing up nearly 80% as the biggest winner on the S&P 500. That said, owners of AMD stock may see things differently: the stock had actually tripled by September, and has fallen precipitously ever since.

Given the above recap, what are you investing in for 2019?

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