The two lubricants of global economic growth have had a rough time of it as of late. Credit, the first of these is remaining stubbornly frozen despite the best efforts of governments and central bankers around the world. This situation is in turn exasperating the recessionary outlook the world was already facing, and in the process magnifying the correction in price of the second, oil.

This has had an adverse impact on all oil & gas producers regardless of their quality. However, we view the correction as overdone and disconnected from the fundamental story supporting higher prices. We believe in time these factors will begin to re-assert themselves and high quality participants, such as Norway’s StatoilHydro (NYSE, STO), will benefit.

 


Now we are not about to make a case that recessions are a positive influence on near term oil prices. Clearly slower economic growth will have an impact on energy requirements and oil & gas are important components of satisfying this demand. And with oil prices running ahead of themselves earlier this summer, a correction was due.

However, what about the medium and long term? The fear of recession is now taking the price of oil down closer to the range where new projects’ economics come into question. Remember that today’s hydrocarbon resources are more complex and difficult to develop. Easy and cheap to produce oil is not a feature of the current environment.

If decisions are taken not to pursue projects due to the non-commercial aspects of the deposit, then the low prices we see today will be successful in destroying future supply. The more familiar demand destruction concept is commonly trotted out, however this lack of investment today will set up an even worse supply crunch in the future. This in turn will result in much higher prices later when economic growth perks up again.

And speaking of economic growth, there are still areas of robust growth in the world. China and India have been responsible for much of this and we expect them to continue leading the way.

Monetary stimulus is on the agenda of both countries. In addition, Chinese authorities have plenty of cash to throw at internal development projects, thus providing a source of strong fiscal stimulus. And it is also important to bear in mind, for a time, growth in China had actually become too fast. Knocking the rate of GDP growth back towards 10 percent was prudent and still represents a substantial uplift over what we have, even during the good times, in the West.

Reforms in India are, in our view, also likely to help underpin higher economic growth in the future as obstacles to development are slowly dismantled.

Ultimately, we believe today’s credit crisis and the policy response to it will yield higher inflation and a weaker dollar.