You might think you’ve been here before, that this is a repeat of 2008, it’s Groundhog Day. If that’s the case, chances are you’re morosely dusting off the CV and looking outside the industry. Just hold off for a moment though, and take a closer look. Things aren’t as simple as they might at first appear.
In 2008, we were introduced to a new phrase – a global financial crisis – or rather The Global Financial Crisis. There was barely a corner of the world unaffected (just keep schtum Canada and Australia). The other new phrase ‘subprime mortgage’ became the stuff of nightmares. Debt – from housing – was widespread – with Goldman Sachs reporting of a US-wide $5 trillion surge in mortgage agreements between 2002 and 2007. In that final year total mortgage exposure in the States equalled 33% of bank assets. The unprepared banks were – well – unprepared when things went south. Legends fell. The giant Lehman Brothers choked on the toxic mortgages and filed for bankruptcy, and the next thing we knew was that economies all over faltered, tripped and just plain collapsed, road kill. ‘Demand for oil’ was an oxymoron. Prices fell from (look away now if you’re having an emotional day) $144 to $33 within five months.
That was 2008. This is 2016, and yes we have another new phrase, ‘Brexit’ or British exit from the European Union. A Bloomberg survey after the vote found that three quarters of economists who responded thought it was likely the UK would slip into a recession. We’ve also rode the rocky waves of another oil price crash. There have been bankruptcies – 59 US energy companies at last count (which compares to the 68 who filed for bankruptcy in the telecoms bust of 2002/03). CNN Money talks about ‘fears that a tsunami of debts are coming from loans that bankrolled the US shale oil boom’ and the Bank of International Settlements reports that debt in the oil and gas sector went up by $1.5 trillion in the eight years between 2006 and 2014. Banks in some parts of the US – North Dakota and Texas, ones which rely on the energy industry, may face problems will the continuing low price of oil. And it’s only nine years since the last crash in prices.
But things are different. People learned from 2008. And things aren’t as they were in 2008. Take the energy loans to banks – similar to the loans for homeowners. They make up 2.5% of bank assets according to Goldman Sachs. That’s ten times less than the 2007 exposure banks faced from subprime mortgages. Crucially the banks learned from 2008 – or rather politicians did and made the banks take action by creating capital cushions that would protect them and us from another financial shock. “There’s going to be pain and losses,” said Jeffrey Shafer, a former Federal Reserve and Treasury Department official. “But I can’t see it having a systemic impact.”
In 2008 when people lost their homes they didn’t go to restaurants or buy an autumn wardrobe. The entire economy tanked. In 2016, oil companies and their workers feel the hit but it’s not as widespread. In addition as theweek.com points out, cheaper gas means budgets for customers and a few countries can go further, “that’s an increase in aggregate demand.”
There’s a difference in the oil market too. In 2008 OPEC cut production. It refused to do that this time as prices crashed. Saudi Arabia simply refused to shoulder the responsibility this time again. A hoped for deal fell through in June when Iran said it would not join the group. But there is a crucial difference. Consumption is different. There’s still demand. It’s growing – though not quite at the same level as production.
At first glance, this cycle looks like the last. But there are significant differences. There’s no way to know what is coming particularly with the Brexit impact, so expect changes. They just mightn’t be so bad – and with the Great Crew Change there are always opportunities for those who look.