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Oil Price Shocks And Catastrophic Financial Losses

Jerry Bowyer | On May 29, 2020

Recently we saw oil prices reach historic lows and in a certain technical case, the option to buy oil in the short run even showed a negative price. Historically, how have severe price declines in oil correlated (a measure of numbers moving in the same direction as each other) with catastrophic financial losses in total return for a nation’s stock market? We chose a cut-off point of the worst 6% of all available returns. So a ‘catastrophic loss’ means that the country in question during the six month period in question did worse than 94% of historic returns.

Plunging oil prices are theoretically a sign of economic pessimism, so it would not be a surprise to see markets offering lower returns during such periods. And that is exactly what we see.

Let’s look at the relationship between periods of time where there is a 57% decline in oil during a six month period and countries suffering a catastrophic loss. This decline is not simply a price decline, because we also adjusted for the effects of production. Oil prices can go down because the global economy slows down and less oil is used, or it can go down because production is increased. We made sure to account for that and adjusted for changes in supply. In the graphic below we define periods with an oil shock as X=1 and periods without oil shocks as x=0. Catastrophic losses are x=1, and non catastrophic losses are x=0:

Here’s a graphical depiction of the same data, with the number of each instance represented by the size of the circle:

What we see is that the pattern is undeniable: 98% of the time when there is an oil shock of this magnitude, nations suffer catastrophic losses. In other words, only one time out of 50 is this fate avoided.

Next time, we’ll look at which types of countries get hit during such events.

Jerry Bowyer

Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.