Oil in NYMEX market hits 53.60 in trading then rises to 56.05:Brent falls to 59. Russia CB raises interest rates to 17 %

The on going turmoil in the oil markets continues with the price today dropping for a time as low as $53.60 in the U.S. NYMEX market before recovering to $56 in later trading. The price for Brent oil touched $59. There is a strong possibility the price might fall a little further in the coming days. The resulting turmoil has put a lot of negative pressure on the currency exchange rate of countries that are major oil producers like Russia already hit by trade sanctions. In what appears to be a futile effort at stemming further falls in their currency exchange rate the central bank in Russia raised interest rates to 17 %. But this will increase recessionary influences there without necessarily rescuing the ruble. It would be a better idea to reduce the interest rates from this level to more reasonable levels and allow the exchange rate to fall to a sustainable level and then build an export strategy on the cheaper currency. Canada has also experienced a significant drop in our exchange rate with the American dollar falling from near parity to 86 cents with perhaps a further way to go. But because of NAFTA this fall will help our exporting firms with new markets. The drop in oil prices are being welcomed by consumers. I nearly filled my gas tank for $20 Can. yesterday in Montreal where prices have fallen from 1.40 a litre to 1.11.4 a litre. It helps that I drive a small fuel efficient car.The extra cash in consumers’ pockets will be stimulative.

However, there may be some trouble in the financial markets in the U.S. where the securitization of loans that involve some oil based assets or currencies based on them may lead to some financial turbulence. Apparently there are about $300 billion worth of Collateralized loan obligations which much like CDOs can get into rough seas when there are wide price swings in the asset markets , in this case the oil markets.The CLOs according to Fortune magazine are very similar to the ill fated CDOs of the 2008 crash. The banks who own about 70 billion $ worth might suffer significant losses if these debt securities fail. Basically high risk and low risk loans have been pooled into these securities and pieces sold to investors. Those who buy the riskier portions get a higher rate of return so long as they don’t fail. But when they do fail the burden will be increasingly borne by them. So we will see whether the banks have once again erred in taking on excessive risk.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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