Seriously—we do not want oil to go up (too much)

All stock markets around the world have fallen in the first six weeks of this year. As of Friday the 13th of February the Australian All Ordinaries index was down 10 percent so far in 2016 (well 9.9 really; but that is close enough to 10 percent). The general agreement seems to be that there are two primary causes: nervousness about the amount of debt that banks worldwide are carrying and the falling price of commodities. In the area of commodities, the two main concerns are oil and iron ore.

In the last few days there has been a bit of hand-clapping for oil because it looks like it is about to go back up. What is not known is how much value crude will regain.

While the worldwide stock markets might want the price of oil to go back up, the way I see it this would not be a good outcome for Western Australia. Apart from the obvious impact of us all having to pay more for petrol for our cars, I can see a somewhat more concerning impact that could eventuate.

At the moment the Big 3 iron ore miners (BHPB, Rio, and FMG) are making a useful profit. Obviously nothing like the insane profits they made in the last five years up to mid-2015, but a useful profit none-the-less. A significant factor in why they are still making a useful profit is that while the value of iron ore has fallen, the cost of energy (mostly oil-based fuels) has come down by a significant amount as well. But if the cost of crude was to climb back to US$70—as is being predicted—but iron ore remains at its current lows, then this will impact the profit margins of all miners including iron ore miners.

So if crude does start to climb back towards US$70 by the middle of the year as the experts think it is going to, but the value of iron ore remains low, then expect the iron ore miners to suufer a high degree pain—which will then result in the inevitable job losses as they try to stay viable.