Article published by José Alberto León Alonso in Diario de Avisos on 12/14/14.
The economic situation has a habit of chaining together negative news in contexts of crisis and positive news in times of recovery, and it seems that this situation is reproduced again. If at the beginning of the crisis one bad news was followed by another and one of Murphy's laws was strictly followed: “if something can go wrong, it will go wrong”; Currently it seems that, fortunately, we are on the other side of the balance, and to the data that indicate a slight recovery of the economy, positive events are added that reinforce the trend towards growth.
The recovery of activity and employment has gained momentum in the fourth quarter of 2014. The positive performance of national private demand is supported by structural factors, such as the correction of internal imbalances, some of the reforms implemented and lower financial tensions, and thus, last week I commented on the positive growth data in the number of affiliates during the month of November in Spain, well above what was expected in a seasonally negative month for job creation. But this week there is a chain of new tremendously positive news in the short term for the Spanish economy.
On the one hand, the Treasury has issued 10-year bonds with an interest rate of less than 2% for the first time in its history. Specifically, the average rate has gone from 2.123% to 1.840%. If the Public Treasury will carry out gross issues in the amount of 242,765 million euros in 2015 to cover its net debt needs and pending amortizations, if rates remain at current levels, the savings for the State for the debt it will issue during 2015 will be no less than ten billion euros, about three billion in 2015 alone, which is no trifle.
On the other hand, the latest injection of liquidity from the European Central Bank (ECB) aimed at boosting consumer and SME credit, known as TLTRO, is proving to be a failure, since the Eurozone banks have only requested only 212,440 million euros of the nearly 400,000 available, which reactivates the ECB's plan B, which is neither more nor less than a direct purchase program of sovereign debt, which implies an expansive monetary policy with funds abundant and cheap. More wood.
Finally, and above all, the fall in the price of oil is not slowing down, but on the contrary, it is accelerating. Last week, crude oil prices suffered another severe drop and several news stories abounded in future price reductions. On the one hand, US oil inventories increased by 1.5 million last week, compared to market forecasts, which expected a reduction in reserves of around three million, so they have a lower need for crude oil than expected. On the other hand, OPEC has revised downwards its forecast for world crude oil demand for 2015. Both data, an excess of supply and a fall in demand lead us to low prices during 2015 for oil, which is trading at a minimum, with falls close to 40% in recent months.
In the last six years, oil production in the United States has increased by 70% through shale oil, obtained thanks to the technique of fracking or hydraulic fracturing, which consists of injecting pressurized water mixed with sand and chemicals with the aim of expanding the existing fractures in the rock substrate that contains the gas or oil, and thus favoring its release to the surface. The US is already the second largest oil producer in the world and in 2015 it will probably be the first, but shale deposits have a short half-life of about three years, so in 2020 it will probably have fallen back in the ranking of producing countries.
If on the supply side the growth of shale in the US puts downward pressure on prices, Saudi Arabia does not seem willing to reduce its supply or that of OPEC to compensate for this oversupply. In an oligopolistic market like oil, large producers (such as Saudi, US and Russia) can manipulate prices by artificially increasing or reducing their supply, and Saudi has two reasons for lowering the price of oil. The first is that he is not interested in continuing to invest in fracking, a more expensive oil extraction technique than Saudi wells. With prices below 70 dollars per barrel, some shale exploitations are not profitable, and below 50 dollars practically all, while the production costs of Saudi oil wells would allow them to support prices of 20-30 dollars/barrel without problems (with much lower profits, of course). On the other hand, there is geopolitics. Many of the Saudi “enemies” (and Americans, who are their strongest ally) have generated an economy absolutely dependent on expensive oil: Iran, Russia and Venezuela cannot survive for long with prices below $70/barrel, so, now that the Americans do not depend on foreign oil imports, a unique opportunity presents itself to sweep the enemies off the map.
For all these reasons, there is already talk of prices around $50 per barrel during 2015… and even lower. Last Monday, Morgan Stanley revised its forecasts downward with a crude oil price around $40.
At these levels, Venezuela, whose economy is already on the verge of exploding due to its mismanagement, will go bankrupt before the end of 2015 (at the latest). Oil constitutes more than 90% of its exports and nearly 50% of tax revenue, and an economy with half the population living on subsidies cannot be maintained without tax revenue. The impact on Ecuador (another country on the Bolivarian axis) will also be significant, since 60% of its exports come from oil. And it will be no less important for Iran and Russia, which will enter economic depression if prices remain at these levels throughout the year.
But for consumer countries (like Spain) it is excellent news. We can save more than 10 billion euros in oil imports, which would increase the disposable income of families and reduce the operating costs of numerous companies. This represents an impact on GDP of between 0.5-1 percentage point, no less. So our growth estimates for 2015 would fall short and should be updated. In this way, our central scenario now forecasts a growth of 2.4% of Spain's GDP for 2015, instead of the 1.8% currently forecast, and creates one hundred thousand additional jobs over the 400,000 forecast. As I said, we have a tailwind. Enjoy it while it lasts.
