Dec. 9, 2014: The Globe and Mail
Don Coxe: Don’t join the crowd betting against Canadian equities

Also published in the Globe and Mail print edition and online for the Globe Investor, Inside the Market.

Oil’s Swoon Sinks the Loon?

The 42-per-cent collapse in crude oil prices since June has been a huge blow to Canadian equity prices, and has sent the loonie diving 7 per cent at a time the Canadian economy is widely admired and strong, compared with most economies in the industrial world.

What hit the TSX and the Canadian economy so suddenly?

Oil prices were set to soften this year, as total world production was exceeding demand, in significant part because of the fracking boom in the United States. Most observers thought the Organization of Petroleum Exporting Countries (OPEC) would cut its production to protect its members’ incomes and slash frackers’ profits. If these were ordinary times in the Mideast, that forecast would have been accurate.

But this has been a year of major geopolitical crises in the region, and the Sunni Arab oil states have found themselves facing grim challenges.

By October, it was becoming clear to us and others that Saudi Arabia and its Gulf Emirate allies could not afford to continue petro-pricing business as usual with sectarian wars exploding out of control, threatening the entire region.

In particular, they were infuriated that the Shia regime in Syria was being propped up by Iran and Russia. Moreover, Iran seemed to be getting closer to becoming a nuclear power with each month. Amid the chaos, the Islamic State terrorists had suddenly become a formidable challenge to the entire region, and they were getting increasing revenues from oil properties they had seized.

The Saudis had long since concluded that U.S. President Barack Obama was a weak reed – at best. So, we believe they felt forced to stop the cash flows to Syria, Iran and the Islamic State and deter Russia. They decided to keep pumping oil, allegedly to fight fracking, but also to weaken their regional foes.

No one knows how long this strategy will continue. The Gulf States have trillions in sovereign wealth funds to back their budgets.

If, as we expect, lower oil prices are here for an extended stay, then Canadian investors should be looking for the winners from cheap oil.

They number in the billions: They live in China, India, Japan, Indonesia, and Europe – and in Canada and the United States.

Cheap gas is a boon for car owners, farmers, mining companies and small businesses. It is also hugely beneficial to airlines, truckers, manufacturers and chemical companies and many other users of energy. That’s a lot of winners compared with the losers – for now – in oil stocks.

We expect global economic growth next year to be strong for the first time since the Great Recession. That means leading central banks can normalize monetary policies, and financial markets can move toward normalcy after six years of near-zero interest rates that distorted business decisions and robbed savers and pension funds of reasonable interest incomes.

That Canadian bank stocks are being dumped amid today’s fear and confusion is just plain ridiculous. Most of their lines of business will be stronger and more profitable next year than now.

Oil’s price should – like other commodities – reflect the cost to produce it and to develop long-term reserves to replace production.

To the extent that OPEC has been able to build in a premium that no other commodity gets, then oil has been overpriced and too many marginal oil properties have been developed, using the huge supplies of cheap money floating in global bond and equity markets.

But the oil and gas industry is one of the world’s mightiest, most diverse, and most useful collections of companies in the world. Its R&D and risk-taking record has led to development of hydrocarbons at prices most consumers can afford – even though they are being consumed daily. There is no scrap oil or gas. It doesn’t need a hidden subsidy from OPEC.

We believe that a lengthy period of $60 to $70 (U.S.) oil will be great for consumers across the world, great for most economies and great for most investors. The current chaos in equity markets – particularly the TSX – will prove to be mere birth pangs for a better investment climate in a better world.