March 2015: The rolling oil price

The rolling oil price and the disinflationary (but hardly deflationary) forces in its wake have spurred the European Central Bank into quantitative easing action – but also sowed the seeds for a pick-up in economic activity that sooner or later will cause central banks all over the world to back away from excessively easy money. We are living through the Great Monetary Polarisation – whether between larger countries and regional blocs, as seen between the US, China, Japan and the euro area, or within these blocs themselves, demonstrated by the tension between Greece and the leading creditor nations in the European single currency.

OMFIF is devoting the March Bulletin to a thorough study of the supply and demand factors behind oil fluctuations, and their repercussions for international monetary policies and financial markets. Duncan Goodwin of Baring Asset Management and Fabio Scacciavillani of the Oman Investment Fund investigate the reasons for excess supply and how quickly this will fall away. Canuto Otaviano, Donald G. Mbaka, John Adams and Anthony Robinson range over the impact on the main emerging market economies, notably China, Russia, Brazil and Nigeria. Simon Derrick of Bank of New York Mellon examines the influence on the oil price of the dollar’s worldwide rally, postulating a circle of causality in which one factor spurs on the other. Steve Hanke looks at moves afoot by political mercantilists in Washington to take export-inhibiting action against countries with currencies that have fallen against the strong dollar. Moorad Choudhry says the fall in inflation and interest rates engendered by the lower oil price adds up to a much bigger challenge for banks than the post-crisis response of tightened regulation.

Darrell Delamaide produces an update on latest Fed thinking on the timing of an interest rates rise, where the odds on an early hike have narrowed after February jobs data showed US unemployment fell to 5.5%, a 6½ year low. As the saga rolls on over Greece’s near-impossible task of reconciling its need for a reduction in debts and austerity with desire to stay in the euro, Michael Burda and Holger Schmieding say the Athens process of muddling through with its creditors represents the country’s last chance for salvation. A post-default Greece would have to earn its imports in a period of turmoil with little hope for international credit for many years, they say – and a devaluation might help exports, but ordinary Greeks would suffer a large hit in real wages, much worse than austerity.

Turning to the institutional investment landscape, Henry Quek of State Street analyses a series of surveys recording how international investors are reacting to changes in the macroeconomic and regulatory environment. In our book review section we highlight three topical volumes: Currency Politics by Jeffrey Frieden, Hall of Mirrors by Barry Eichengreen and Frontline Ukraine by Richard Sakwa. Each sheds light on fluctuations in currencies, economics and geopolitics besetting markets, all of which find expression in the ups and downs in the oil price.

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