The collapse of commodities that drove oil prices back below $70 a barrel Thursday is reverberating through the world economy from Texas to Timbuktu.
While falling commodities prices are helping struggling American consumers and businesses with dramatically lower energy costs, they are devastating rising stars such as Brazil, Russia, Dubai and Australia. Even China, the engine behind the commodity boom, is faltering, though it remains one of the only emerging-market juggernauts that still has growing surpluses of cash to keep plowing into U.S. financial markets.
Indexes of major commodities from copper and wheat to coal and corn have plummeted more than 40 percent since setting record highs in early July, led by the halving of oil prices. The big drop in energy costs helped give Wall Street a lift Thursday, sending the Dow Jones Industrial Average up 401 points.
While the price plunge has brought welcome relief from commodity-fed inflation that surged to 5.8 percent in the United States, it has hurt some U.S. energy investors, farmers and mining companies while causing a collapse in income for major commodity producers like Brazil, Russia and the Middle Eastern oil exporters, most of whom depend on the revenue from commodity exports not only to drive growth but to fund government.
As the commodity bubble burst in July, revenues abruptly fell, leading to precipitous drops in the financial markets of emerging countries. Those declines accelerated with the recent rout in global markets. The economic outlook has dimmed for countries that once boasted double-digit growth, while their brimming coffers of foreign reserves have stopped growing.
Brazil's international reserves fell by nearly $1 billion in one day this week to $203 billion, while the drop in revenues of oil producers like Russia has been even steeper, sinking the country into a deep financial crisis. Russia's 25 richest oligarchs reportedly have lost an astounding $240 billion from the crisis in commodities and other financial markets.
Within a matter of months, Dubai, an oil-rich emirate in the Persian Gulf, has gone from boasting it would become a major new Middle Eastern financial center serving businesses around the world to having to be bailed out of a financial crunch with a $15 billion cash infusion from its sister emirate, Abu Dhabi.
"It's just one of a number of warning signs" that the commodity boom has quickly turned into a monumental bust, said Una Galani, analyst at Breakingviews.com. The meteoric fall of oil prices prompted the OPEC oil cartel Thursday to schedule an emergency meeting next week to consider cuts in production.
The sudden end of the commodity boom is expected to cause the collective reserves of producing nations to fall from a peak of $1.1 trillion last year to an estimated $857 billion this year, according to the Institute of International Finance (IFF).
The end of the revenue boom this summer, in turn, hurt U.S. financial markets — particularly U.S. mortgage and bond markets where much of the petrodollars and surplus revenues were routinely deposited. Foreign capital flows into U.S. stocks and bonds suddenly ceased and turned into net withdrawals from U.S. markets in July and August, according to the U.S. Treasury reports, in a development analysts say helped precipitate today's financial crisis.
While high food and energy prices earlier this year angered consumers and hurt their purchasing power, IFF analyst Philip Suttle said the economic strength of emerging commodity producers mostly was a boon to the U.S. economy, not only because they provided the capital needed to support U.S. financial markets, but because their rapidly growing economies proved to be excellent markets for U.S. exporters.
Robust growth in U.S. exports in the first half of the year — mostly to the developing world — enabled the U.S. economy to post overall growth, although the domestic economy was in recession.
"Emerging economies provided an important support to global demand at a time of weakening demand in the major economies," Mr. Suttle said, and with their willingness to invest surpluses in U.S. and European markets, they were "seen as a key part of the solution to the financial crisis" engulfing the West.
With rapidly developing problems of their own now, however, states with petrodollars and other commodity producers will not be as helpful to the U.S. economy and markets, he said.
Joe Maguire, analyst with Standard & Poor's Corp., said the big appetite for raw materials by manufacturers in China and India not only lifted the economies of emerging producers but gave a big boost to U.S. producers in energy and mining, providing another important support for the U.S. economy in the past year.
However, he expects the global economic slump to reduce growth in China from soaring rates around 12 percent in recent years to as low as 8 percent. The slowdown in China is the main reason for the big drop in commodity prices since summer, analysts say.
"China has paused for breath, and knocked the wind out of the global commodities boom," said John Foley, an analyst with Breakingviews.com, noting that the Middle Kingdom accounted for more than 40 percent of the growth in global commodities in recent years.
Even the modest slowdown in China so far has translated into devastating losses for mining companies like Rio Tinto, an Anglo-Australian company that provides China with basic commodities such as iron ore, aluminum and steel.
Nevertheless, commodity producers are counting on moderate growth in China in the next year to keep prices from imploding further, the analysts said.
The drop in prices has been a disappointment to growing hordes of investors who had flocked to the commodity markets in hopes of earning double-digit returns as well as to hedge their portfolios against rising inflation and the falling dollar. For much of the year, oil and commodity prices rose inversely with the rapid decline of the dollar. In July, that pattern reversed, with the dollar rising as commodities started to sink.
As a result, the value of commodity investments held by professional managers dropped by 22 percent or about $60 billion in the third quarter, the first decline in five years, according to Barclays Capital. Assets invested in commodities shrank to $211 billion at the end of September from $270 billion in June.
Bruno Lebre, head of investment at SG Private Banking, said he has been advising his wealthy clients lately to limit energy and metals exposure in their portfolios.
"Commodities were in fashion at the beginning of the year and clients reduced their exposure midyear," he told a Reuters conference, but he said the outflow from commodity funds has not turned into a full-fledged retreat. "It's not that brutal. But we're telling them to reduce, or at least not to increase, the commodities component of their portfolios."