Yesterday, oil plummeted to its lowest level in nearly seven years…
The price of oil fell 6.2% to $37.65, its lowest level since February 2009. Oil has now fallen an incredible 65% since peaking at $106 in June 2014.
The world has a massive oil surplus right now. The oil stockpiles of developed countries hit a record high of nearly 3 billion barrels in September, according to the International Energy Agency. Yet major producers are still pumping oil…
Monthly oil output for the U.S., the world’s largest oil producer, is at its highest level in nearly three decades. Russia, the world’s third-largest oil producer, is pumping more oil than it has since the Soviet era.
The Organization of Petroleum Exporting Countries (OPEC) is also pumping near record amounts of oil. OPEC is a cartel of 12 oil-producing nations. It accounts for 40% of the world’s annual oil production. On Friday, OPEC made clear it isn’t cutting production.
• Weak oil prices have crushed energy stocks…
SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which tracks large U.S. oil producers, has dropped 61% since oil peaked last June.
Oil services companies, which sell “picks and shovels” to the oil industry, have also tanked. The Market Vectors Oil Services ETF (OIH), which holds 26 oil services companies, has lost 50% since last June.
• Oil companies have shelved billions of dollars’ worth of projects…
Energy consulting firm Wood Mackenzie estimates that North American oil companies alone have cut spending by $220 billion since last summer.
And that’s only the beginning. The firm estimates that $1.5 trillion worth of North American oil projects can’t make money when oil trades for $50 or less. With oil trading below $40 now, they’ll likely make even bigger cuts.
Meanwhile, investment research firm Moody’s expects cash flow for the global oil industry to drop by at least 20% this year.
• Canada’s energy sector is in a full-blown crisis…
Canada is the world’s fifth-largest oil-producing country. Crude oil makes up 18% of Canada’s exports, making it by far the country’s biggest export.
In October, The Conference Board of Canada said it expects revenues for Canada’s energy sector to fall 22% this year. It also expects the industry to record a net loss of about C$2.1 billion ($1.6 billion) in 2015. Last year, Canada’s energy industry made a C$6 billion profit.
• E.B. Tucker, editor of The Casey Report, said this would happen…
A few months back, E.B. visited Canada’s oil country to see the crisis firsthand. E.B. shared his analysis in the October issue of The Casey Report.
In that issue, E.B. said Alberta would become ground zero for Canada’s energy crisis.
Alberta accounts for 16% of Canada’s $2 trillion annual GDP. And energy makes up a quarter of Alberta’s economic output. That means the entire province of Alberta is heavily influenced by the price of oil.
Alberta’s economy shed 63,500 jobs from the start of the year through August. It hasn’t lost that many jobs in the first eight months of the year since the Great Recession. Last month, Alberta’s unemployment rate jumped to 7%, its highest level in five years.
• E.B. also said the crisis would spread from the oil patch to other parts of Alberta’s economy…
While energy only makes up 25% of the province’s GDP, Albertans will be shocked when they see what happens to other sectors now that the oil business has been cut in half. Construction, finance, real estate, and services all benefited from a 15-year oil boom. These other sectors will start shrinking soon. And it’s not going to be pretty.
E.B was right. The boom times are clearly over…but Canada’s economic problems are just starting.
• Canada’s central bank is scrambling to fight the crisis…
Lowering interest rates is the main tool central bankers use to stimulate the economy. To fight the financial crisis, the U.S. Federal Reserve cut its key rate to effectively zero in December 2008. Low rates make it cheaper for consumers and businesses to borrow and spend, which helps the economy…at least in theory.
The Bank of Canada (BoC) – Canada’s version of the Fed – has already cut rates twice this year. Its key rate is now 0.5%.
• The Bank of Canada might drop its key rate to zero soon…
Last month, Carolyn Wilkins, the BoC’s number two official, said, “It’s more likely that policy rates will fall to zero than in the past.”
Even so, more rate cuts are unlikely to help Canada’s economy. Last month, Bloomberg Business reported that the Bank of Canada is already considering other options.
“One important challenge for central banks now is that conventional monetary policy is stretched to its limits in some countries, where policy interest rates are at, or below, zero,” [Wilkins] said. “Because of this, a number of countries are using innovative monetary policy measures to return inflation to target.”
Wilkins is essentially saying the BoC might launch its first quantitative easing (QE) program. QE is when a central bank creates money from nothing and pumps it into its financial system. It’s basically another term for money printing.
• QE would devalue Canada’s currency even more…
Yesterday, low oil prices pushed the Canadian dollar to an 11-year low against the U.S. dollar. The Canadian dollar is now down 15% against the U.S. dollar over the past year.
QE pumps money into a financial system without creating anything. The result is more currency units chasing the same number of goods. This makes a currency less valuable. QE is the last thing the Canadian dollar needs right now.
As Casey readers know, the Canadian dollar is just one of many major currencies that has lost a huge amount of value this year. The Japanese yen has lost 16% against the U.S. dollar over the past year…the euro has lost 18%…the Australian dollar has lost 19%…the Mexican peso has lost 22%…and the Brazilian real is down 39%.
These are stupendous moves for major currencies. After all, we’re not talking about volatile biotech stocks. This is the value of money in peoples’ bank accounts.
• These huge losses suggest we may be in the early stages of a global currency crisis…
Casey Research founder Doug Casey has been warning of a currency collapse. He believes a collapse of major currencies could wipe out trillions of dollars in wealth, including pensions. Here’s Doug:
It’s going to be much more severe, different, and longer-lasting than what we saw in 2008 and 2009…The U.S. created trillions of dollars to fight the financial crisis of 2008 and 2009. Most of those dollars are still sitting in the banking system and aren’t in the economy. Some have found their way into the stock markets and the bond markets, creating a stock bubble and a bond super-bubble. The higher stocks and bonds go, the harder they’re going to fall.”
Unlike most people, Doug Casey has actually lived through a currency crisis. He was in Argentina when its currency collapsed in 2001 during the largest sovereign debt default ever. By making smart investments, he even managed to make a large gain on his money in the aftermath of the crisis.
We recently recorded a video presentation with Doug on this topic. In the video, Doug shares his advice on how to position your money and investments for the collapse of a major currency like the U.S. dollar. Click here to watch the video.
Chart of the Day
The currencies of several major oil-producing nations are collapsing…
Crude oil is the number one export of Canada, Norway, Russia, and Colombia. Each country’s currency tends to move with the price of oil.
Today’s chart shows the performance of all four currencies versus the U.S. dollar. As you can see they have all crashed over the past year.
The Canadian dollar (CAD) has dropped 15% to an 11-year low. The Norwegian kroner (NOK) has dropped 18% to a 13-year low. The Russian ruble (RUB) has dropped 23%. It’s now within 2% of the all-time low it hit in August. The Columbian peso (COP) has dropped 30%. It’s also flirting with its all-time low.
Delray Beach, Florida
December 08, 2015
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