When an asset price collapses at the speed that oil prices fell in 2014, the pain is quick and concentrated, but the benefits come more slowly and are more widely dispersed.

High-yield debt in the energy market
In North America, the energy exploration and production industry has expanded to include a significant number of projects with cost structures that do not make sense with oil prices at current levels. Many of these projects have been financed with high-yield debt, to the extent that energy and mining companies now constitute approximately 15% of the high-yield sector. High-yield spreads widened substantially in recent months, and many leveraged energy firms must now consider new strategies to service this debt.

Oil exporters feel a pinch
On the world stage, a number of countries have funded their budgets and current account deficits with expensive oil. Of these countries, Russia was one of the first to see its domestic market pushed into turmoil because of lower expected oil revenues. The ruble weakened as the economy tipped toward recession, prompting Russia’s central bank to lift short-term interest rates to 17%, which places an additional burden on the economy. In addition to Russia, Venezuela and Nigeria are also vulnerable.

average gasoline expenditures

Consumers get savings
The drop in energy prices works as the equivalent of a tax cut in developed economies, with the consequence that consumers will have more money to spend over the next couple of years than they had anticipated. For example, the U.S. Energy Information Administration, in its December 2014 Short-Term Energy Outlook, forecasts that the average U.S. household will spend $550 less on gasoline in 2015 than in 2014, a drop of over 20%.

Oil importers benefit
Japan, as an oil importer, benefits for similar reasons, but the picture is complicated by the fact that the Bank of Japan has been seeking to stop deflation. Among emerging markets, Turkey is a winner. An energy importer, Turkey has maintained a large current account deficit, which is now likely to move toward balance because oil prices are down.

Read the full Putnam Capital Markets Outlook.


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