FANG — For (yet) a-nother game?
FANGs seem to be the talk of the town. Facebook, Amazon, Google and Netflix have seen their stock prices rise enormously (over 200%) over the last few years. Facebook after its disappointing IPO seem to have gotten its groove. Amazon just reported its quarterly earnings which were slightly off analyst expectation. Google, or should we call it Alphabet now, after sliding down earlier in the year has regained some ground. Netflix recently seem to face what Alphabet faced earlier in the year, a fall in stock prices which is to the tune of 20% year-to-date. These are not the only reasons but I, and am sure others too, believe that the fortune of these companies cannot elevate the distressed economies of the world.
Unless you were staying in Mars over the last year you would know that the Oil prices have dropped over 50 % since the middle of 2014. The sluggish world demand is not the only factor to be blamed for this but also the excess supply or glut in the system. The fear of the US ‘fracking’ shale oil has lead Saudi Arabia to increase production. This phenomenon is not unprecedented where the increase in production decreases the price (even if you don’t know economics). Back in the 1980s it was non-OPEC countries who sent the price spiraling down when they increased the production and towards the end of that decade similar to the behavior by the OPEC countries today.
The one thing different from the Texas Railroad commission and OPEC was the mechanism for price enforcement. OPEC had nothing but the (over)production capacity of a few powerful countries to threaten with if anyone cheated or produced more than the quota. It was the war, the first being the Yom Kippur war and other being the Gulf war, that stirred the demand for oil. There is record of the Saudi Arabian ministry predicting a crash if the oil prices soared and were out of reach (in 1980) but none paid any heed to it. Lucky for some the drop in oil price in 1980 did not live for long. Today, it’s a totally different story.
Azerbaijan, who are heavily dependent on oil and gas exports, has been battered. Venezuela is crashing. Not all OPEC countries share the same fate. The problems are endless. The IMF has rushed to Azerbaijan to work around an emergency loan. I don’t think Venezuela, who have already pulled a sum of money out of the IMF towards in the end of 2015, can carry on without some help.
Saudi Arabia’s reserves are fast burning through. Though they might have sufficient reserves to carry on this year, the pace at which they are eating through the reserves indicate it won’t be for long until they will have a change in tactic. Saudi Arabia as a country is changing. They have taken steps to move away from being an export driven country. The government had sanctioned an expenditure of 200$ billion in 2014. Their investment in construction and science and technology are clear indication of change in strategy (from an export driven to a consumption driven). They would only benefit if the prices of oil rise.
A number of energy companies in the United States are on the brink of bankruptcy. They have no option but to keep drilling so that they can create some revenue of this. Banks are conducting stress tests to assess if the banks can withstand large defaults. Russia, who faced the brunt of the oil prices as well, has comparatively adequate (I assume adequate) reserves to see them through the year. But a host of emerging as well as developed markets face serious consequences if the price of oil doesn’t rise.
Economists predicted that the global GDP would rise by 0.1% for every drops by 10$. But this increase has been countered by the drop in demand and revenue for the exporting countries (devaluation and drop in commodity prices). Importing countries must make use of this situation. Both the developed and emerging markets should reassess the situation for potential growth and geopolitical risks. Currency wars have proved to be beneficial to no one and so I hope OPEC introduces a price mechanism structure. Or, are we about to see another play?
