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The oil puzzle

Oil has floated to the top of the headlines these days, and no surprise. We haven't seen US$60 per barrel Brent crude since the Global Financial Crisis. What exactly is going on here, and what does it mean for us?

The experts are divided. There seems to be some consensus, that Russia's rouble problem is unlikely to trigger a runaway crisis; but whether the continued drop in oil prices is going to be good for the rest of the world doesn't draw unanimous answers.

This is what the optimists say: A Russian currency crisis is a contained problem. Russian foreign reserves are healthier than in the previous currency crisis. And yes, previous crisis, because the rouble's had its run of problems before, and in those instances nobody else was really hurt. Even if there were a crisis now, there aren't enough economies and businesses out there dependent on the rouble and the Russian economy to make this a global or regional concern. And if there were, capital would flow into safe havens like Singapore and Hong Kong and China. Besides, lower oil prices are actually supportive of economic growth. All of the net oil importers, like Singapore, are going to get a boost.

This is what the pessimists say: The problem with a full-blown crisis in Russia is that once it hits, markets will begin to look for the next most vulnerable economy. And there are quite a number of oil-dependent economies out there that are at risk of a fiscal deficit if oil prices do not recover. The impact of a Russian crisis is not simply on the currency side. Emerging credit spreads are widening quickly, and with double-whammy of rising interest rate expectations, companies are going to find it harder to access capital. And flight-to-safety flows might not be as strong as the optimists suggest. Sure, Singapore could benefit from de-risking within the region, but on a global scale, a crisis would send capital out of Asia in general. So Singapore could find itself in a situation where its economy still suffers, just not as much as its neighbours.

In the meantime, economists are tempering 2015 growth expectations for Singapore.