Oil price slowdown hangs over the Middle East economy

It could be that the stock markets of the region have made a big mistake and are now pricing in a downturn that is not going to happen. Markets are given to irrational ups and downs, but seldom get the big picture entirely wrong.

Indeed, the stock markets may be reacting to two things. First, a deceleration in the rate of profit growth, i.e. investors got carried away with exponential profit projections. And secondly, the outlook is for a lower oil price.

Could the market be right and the oil price be heading lower? Well, it has not done so this year, despite some good reasons to expect a fall. But if you look across the Atlantic to the US housing crash, and how that is likely to play out into a US recession and US stock market correction then this may be a temporary reprieve.

Oil price collapse

In the past all oil booms have ended in the same way: a high oil price sooner or later drives the oil consumer economies into recession and the oil price collapses, very quickly and very substantially.

Today we have the opinion of Citigroup that $30 of the current $63 per barrel oil price is supported by speculation. In a US financial crash those leveraged dollars would evaporate and the oil price slump.

On the other hand, the world is full of geopolitical accidents waiting to happen. Iran and the US could have a showdown. Nigerian politics could explode. Venezuela could decide to teach the US a lesson. The list gets longer and longer, increasing the probability of such an event.

However, markets do go up and down and a short-term oil price correction resulting from a US economic slowdown or recession must be the most likely future planning scenario.

Caution wins

In that case it will be the business planners who are cautious in their expansion plans, or even take the contrary view and scale back while others are still relatively bullish, that will come out on top.

For in a regional business downturn there will be a sharp division between the winners and losers. Rising markets carry everyone higher. It is not the same in a downturn. Those who have the biggest debts, half-completed developments and largest overheads are hit hardest as profits vanish and are replaced by losses.

Those who have cut debts, finished projects and trimmed staffing levels are the survivors and will be best placed to capitalize on the upturn when it comes. And it will come, but you need to be sure that you are around to see it.