Zero Sum Game

Childish Joke

Bet nobody has tried this one on you for a long time. Unless you have grandchildren.

What’s the heaviest? A tonne of lead or a ton of feathers?

The answer is they both weigh the same. I can see your sides splitting with that one.

However it was a trick question. I mixed my tonnes (Metric) and tons (Imperial).
Imperial ton = 2240 lb = 1016 kg metric tonne = 1000 kg = 2205 lb

The correct answer is therefore the ton of feathers. But frankly who cares? Well Brussels does actually. If either a ton or a tonne fell on you, you would be squished. The difference is the metric tonne would result in much more paperwork. It’s too early for me to comment on Europe but after reading Roger Bootle’s excellent book, I’m with Boris. Anyway enough of Europe.

Win or Lose

Let’s talk about the price of oil instead. Shell and BP are perhaps the obvious losers from a drop in the price of a barrel. Quite rightly the shares have fallen 48% and 40% from their peaks of September 2014. Ouch. They are a couple of the larger shares that make up the FTSE 100 index, so not surprisingly from it’s peak last April it too fell 19%. But neither Shell nor BP can set the price of oil. They cannot make the price rise to make more profit. Supply versus demand does that job and pulling the strings are nations not companies. Saudi Arabia, UAE, Iran, USA, Venezuela, Libya, Russia, Norway etc.

So here we are. Too much supply, we are awash with the stuff. Hence a barrel of oil is cheap. It’s been calculated (I don’t know who does this) that when oil falls by $10 a barrel, the revenue lost is a mighty $1 billion per day! It’s fallen by almost $100 over an 18 month period. I can’t calculate the losses the number is just too big. So let’s look at the oil producing nations as the ton of lead. One huge great lump of immediate and ongoing loss. A ton of losses.

Lost or moved?

So where does a $1 million trillion billion gazillion go when it gets lost. Well interestingly it isn’t lost it’s just been moved. We are the billions of feathers that make up the ton of feathers. I can’t prove there are a billion feathers in a ton. Just stick with me here. Think Blue Tit not Ostrich. If the oil nations can’t sell for $100 a barrel then we are not buying it at $100 a barrel. The money isn’t lost is been redistributed to us. Not in one big lump but in lots and lots of tiny feathers. Visible in petrol receipts, future utility bills, reduced delivery costs to supermarkets bringing the cost of food down, air fares, cruise tickets etc. etc. etc. It’s a zero sum game. OPEC win and we all lose. OPEC lose and we all win. It’s just taking some time for us all to realise we are the winners.

OK then. Why have other shares fallen too?

Well it’s supply and demand at work again. Imagine the Sheiks and Oligarchs with their wheelbarrows full of Petrodollars. The money has been coming in for decades. It’s been buying London property, Football clubs & bling of all shapes and sizes from diamond encrusted underwear to gold plated Rolls Royces. Some of the more sensible purchases though have been Global Shares, Government Gilts, Corporate Bonds & Foreign Currency. With the books no longer balancing at $30 a barrel, the wheelbarrows are being used to bring the cash back home. Whatever can be sold quickly and easily.

Normal service will be resumed

On the left side of the scales I give you a ton of lead. On the right side of the scales slowly building is a ton of feathers. Balance will be achieved when individually we all spend our oil savings, generating business profits from Greggs to Harrods. More company turnover means more profit. The profit leads to higher dividends which means share prices will rise once again.

The smart money is on the oil imbalance coming to an end towards the Autumn. Unless a deal is done behind the scenes where all the oil producing nations agree to cut back production now. That looks unlikely. Saudi Arabia agreeing anything with Iran?

Buy Oil

At some point we will be investing in an oil fund, looking to ride the doubling in price from $30 to $60 a barrel. Just not yet. We can’t buy oil. Where would we store it?