The worldwide stock market crash on August 24 – dubbed “Meltdown Monday” – was the worst sell off for many indices in years. The turmoil was led by China, whose Shanghai Composite sank 8.5 percent on August 24, followed by an additional 7.6 percent loss the next day. Stock markets across Asia, Europe, and the United States were thrown into a panic on Monday, before stabilizing somewhat on Tuesday.
We have spent quite a bit of time talking about China’s fragile economy this summer, ever since the stock market started crashing in June. After a few weeks of relative calm, the currency devaluation earlier this month set off a new round of trouble. China’s problems are far from over.
The meltdown could not come at a worse time for the oil markets. Already suffering from too much supply, Chinese demand is no longer a given. Demand had already been slowing, but it could slow even further now that the economy is showing some serious cracks. And if that causes contagion in other countries, oil prices could stay low for a much longer period of time than many anticipated.
Low oil prices have the world turning their eyes once again towards Riyadh. Saudi Arabia holds the only keys to higher oil prices, if it chooses to cut back on production. But it has shown a dogged determination to continue to pursue market share. However, Saudi Arabia is suffering just like everyone else.
The Saudi government is reportedly conferring with advisers on how to make deeper cuts to government spending in order to stop the hemorrhaging. Saudi Arabia’s budget deficit is expected to balloon to 20 percent of GDP this year. According to Bloomberg, Saudi Arabia may shave off 10 percent of the $102 billion it had planned on spending on infrastructure and other investments.
Saudi Arabia is not the only oil giant looking to husband its shrinking pile of money. Russia revised its GDP forecast lower, expecting its economy to contract by 3.3 percent this year. That is down from the negative 2.8 percent growth rate that it had expected in an earlier forecast. More pessimistic forecasts could yet be forthcoming, depending on the trajectory of oil prices. The ruble is deteriorating to near multiyear lows and could yet worsen.
That has the Russian government a bit more cautious than it has been in the past. The FT reports that the state-owned oil firm Rosneft has been rebuffed by the government for new funding. Rosneft sought money from the state’s sovereign wealth fund for new drilling plans, but the Russian government rejected four out of the five proposed projects. Just a few weeks ago, Rosneft’s Igor Sechin said that his company would focus on boosting production at existing fields, widely read as a chastened tone and an admission that the Russian government would not be hugely generous with new spending.
