Transcript The Zero Sum Game

J. Michael Issa
[email protected]
Ronald A. Clifford
[email protected]
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The June 23, 2016 Brexit referendum calls for
the U.K.’s exit from the European Union
◦ Exit requires the unpicking of 43 years of treaties
and agreements covering thousands of subjects
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The withdrawal may take place as early as
December 2018, but others in the British
government claim that full exit negotiations
may not conclude for as many as 6 years.
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Immediate dramatic fall in the value of the
pound against the dollar (10% value lost,
lowest value in more than 30 years)
Britain lost its AAA credit rating
The Bank of England has cut interest rates
from .5% to .25% to stimulate the UK
economy amid uncertainly over Brexit
BBC News
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Britain is one of the largest economies in the
world, which means that a weaker British
economy would effect the billions of pounds of
imports each year
Most economists predict that Brexit will have a
more meaningful impact on Europe than the U.S.
economy.
A Wall Street Journal survey of leading
economists “found forecasters making no major
changes to their projections for economic growth
this year or next due to Brexit.”
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The Bank of England does not expect Britain
to fall into a recession as a result of Brexit
Economic growth for Britain is forecasted to
dip over the next 12 months.
Unemployment in Britain is predicted to rise
from 4.9% to 5.5% over the next 12 months
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Oil prices have fallen more than 46% to 7year lows
◦ Oil prices for Bent crude were as high as $115 per
barrel in June 2014, and closed just north of $44
per barrel on August 15, 2016
◦ A gallon of gasoline in the U.S. averaged $3.51 in
March 2014, and $2.12 on August 16, 2016
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For the past decade, oil prices have hovered
around $100 per barrel.
High oil prices are credited to increased oil
consumption in developing countries and
conflicts within oil producing countries.
The inability of oil production to meet
demand caused a spike in oil prices
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Efficiency, and a declining global economy
caused a shift in demand for oil over the past
year.
The U.S. and Canada began a large-scale
extraction of shale and oil sands deposits (oil
production in the U.S. and Canada is outstripping
Saudi Arabia).
By the end of 2014, a perfect storm presented
itself with weakened oil demand and an everincreasing oil supply (US production has nearly
doubled over the last ten years.)
By the end of 2014 the price of oil begins its
free-fall
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In a surprising response to rapidly falling oil
prices, OPEC members decide not to cut
production, precipitating a further decline in
oil prices.
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There are short-term and long-term effects of the oil price
free-fall:
While there are long and short-term effects of the
fall in oil prices, the negative effects are largely the
short term problem
◦ Short-Term Effects
 A decrease in profits for the energy sector (the largest increase in the
U.S. economy since the great recession was in the energy sector), which
will cause a contraction of spending by energy companies (lower
employment spending, lower spending on infrastructure). This may be
catastrophic for the service companies.
 Volatility in oil producing countries (decline of the Russian ruble,
contraction of the Venezuelan and North African economies).
◦ Long-Term Effects
 A continued slump in oil prices that erodes earnings and values in the
energy sector.
◦ Long Term
The Zero Sum Game
As oil prices decline, those economies that are “oil consumers” see
economic growth through an “energy savings.” Those economies
that are “oil producers” pay the toll for the economic growth of the
oil consuming economies.
This analysis applies domestically as well. Lower profits in the
energy sector because of falling oil prices are accompanied by
gains in retail and transportation industries through lower fuel
costs.
The E&P Companies will hammer their service companies for lower
day rates to improve the upstream margins. The service
companies are driven to the brink by sharp declines in their
utilization rates and day rates.
The Unknown
In the past, lower oil prices have almost invariably been driven by
cyclical economic contractions.
The current dip in oil prices is being driven largely by increasing
supplies than by dwindling demand.
Certain industries are poised to feel the positive
effects of lower oil prices, while others may
likely experience the negative effects
 The Lucky Ones
-Airlines
-Processed food manufacturers (savings on freight
and an uptick for consumer demand)
-Automobile manufacturers (higher demand for
higher margin vehicles such as SUVs
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Those That Are Bracing
◦ The energy sector (both exploration and production
and service companies)
Where do oil prices go from here?
But here is an interesting question. Can any
commodity sell for less than the cost of
producing the commodity long term?
Economic Environment
Although it is impossible to say with absolute certainty, this history of the 1969-2014 economic
cycles might lead one to conclude that the US is likely within a year or two of the next downturn.
2016 Presidential Election
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Second Pockets for Payment
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4.
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Credit Cards
Credit Insurance
Letters of Credit
Personal/Corporate Guarantees
Revisiting Credit Scoring
Updating Credit Applications
Repayment Agreements and the Chapter 11
Customer