Why BMO’s CEO expects it to take two or three years for oil prices to stabilize

Oil prices won’t go back to more normal levels for two or 3 years, and people expecting a speedy rebound out of this month’s 12-year lows are being unrealistic, Bank of Montreal Ceo William Downe said.

“It’s unrealistic to believe it’s going to snap back,” Downe said in an interview Friday in Davos, Switzerland. “Prices will normalize after which begin to progress.”

World leaders and CEOs of some of the biggest companies have gathered now for that annual meeting of the World Economic Forum in Davos, where issues such as the global markets rout, China and plunging oil prices have dominated discussions. Oil prices have fallen by nearly a third previously Twelve months, as well as on Jan. 20 sunk below US$27 a barrel before rallying.

For a guide how the present oil rout will affect North America’s economy, one should look back 3 decades, said Downe, 63, who oversees Canada’s fourth-largest lender by assets.

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Alberta, Texas

The downturn in 1986 is the only really useful example for attempting to chart the impacts from today’s slump, he said. Its northern border American benchmark West Texas Intermediate price sunk to a low of US$9.75 a barrel on April 1, 1986, a lot more than two-thirds under the preceding November. Downe spent the early a part of his career at the bank centered on the national-resources sector and lived for 10 years in Houston.

“We had a contraction in the Alberta economy and Texas economy of about exactly the same magnitude, movement within the unemployment rate of the items I think will be about the same magnitude along with a degree of distress concerning the decline in price,” he said. “But within 2 to 3 years, there was a tremendous rationalization. Prices gradually moved support. The industry was far more efficient and companies which had reordered their production were more profitable.”

Oil prices will improve when production eases and there’s less push by producers trying to maximize income by bringing more supply on stream, thus removing an industry imbalance, Downe said. Demand for oil continues, he said.

“Worrying that global demand will fall is probably not realistic because global demand has increased by 1.6 million barrels within the last year,” Downe said. “So the rhetoric needs to line up using the facts.”

China ‘Transition’

Oil markets this year will mirror a lot of what’s been happening yesteryear 2 to 3 months, though perhaps without as much volatility seen in the very first 3 weeks of January, he said.

Separately, Downe discussed the “very significant transition” happening in China, a country his Toronto-based bank has operated in forever from the 19th century. China should continue its economic transformation despite the volatility, Downe said.

“The push to go from a manufacturing/export to some consumption-driven economy is exactly what the world has been calling out for,” Downe said. “I believe China does the things they ought to be doing, and they need to keep to the five-year plan, which is a pretty good guide, and never deviate from it, and recognize that the uncertainty is creating volatility.”

The Asian nation is maturing in the take on how you can develop a more dynamic economy to produce chance of urban dwellers, he said.

“I think it’s been a miracle that they’ve had the opportunity to complete in addition to they have,” Downe said. “So I’m not pessimistic whatsoever. If you don’t go ahead and take long view in terms of the transition in national economies, you’ll go crazy.”

Bloomberg News