Russia to Fall Victim to Oil Bubble Bust – Morgan Stanley

The fall in world oil prices is the beginning of a major shift in the global economy and the end of the “commodity supercycle,” spelling trouble for raw material producer countries like Russia, a senior US banker said late on Monday.

“In general, when prices reach the point that spending on oil equals six percent of gross domestic product, demand falls and growth starts to stall; the world economy hit that point just before the recent fall in commodity prices,” Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, wrote in an article published in The Financial Times.

Now the commodity bubble is expected to implode, world oil prices will fall, while world economic growth will accelerate, Sharma says. This process will last about twenty years, and then usher in a new decade of expensive oil.

“The mania for oil bore striking similarities to the dotcom mania of the late 1990s,” Sharma says. “At the height of the dotcom bubble, tech stocks comprised 25 per cent of global markets. After the bust, commodity stocks – energy and materials – rose to replace tech stocks and, by the end of the last decade, accounted for 25 per cent of global markets too.”

The commodity mania gave rise to a new industry of investment funds that allow even ordinary people to trade in commodities. The total sum invested in commodity funds has more than doubled over the past five years to more than $400bn in 2011.

“The daily volume of trades in energy futures is now a staggering 25 times higher than daily global demand for energy. Speculators rule the markets, and many are suffering as prices fall. Their loss is a gain for consumers around the world.”

“The commodity bubble has had a larger impact than the dotcom boom. While rising stock prices generally boost the economy, high prices for staples such as oil impose costs on businesses and consumers, and act as a drag on the economy,” Sharma’s report concludes.


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