Oil’s fall bad for Russia, could be a concern to Fed

The dramatic drop in oil prices has prompted some worried musings among economists.

Maybe it’s some kind of pessimistic reflex in the dismal science of economics. Or maybe it’s the uneasy feeling that anything really bad for both Texas and Russia is potential trouble. Maybe it’s bad dreams about the last recession.

In any event, despite the huge windfall being given American consumers this holiday season in the form of much-lower energy costs, there are concerns.

For instance, economist Tim Duy – a noted Federal Reserve watcher and a professor at the University of Oregon – has suggested that the fall in energy prices could be a problem in ways both expected and less so. For starters, says Duy, there’s this week’s collapse of the Russian ruble.

Because the Russian economy is so energy-dependent, it has taken a shellacking as prices have fallen. And those losses spurred the Russian central bank to ratchet up interest rates to 17 percent.

Great for lenders but for borrowers — not so much.

The move was apparently meant to draw in some investor money – which the Russians now badly need – but it’s also likely to crash the economy into recession. If it’s not already there.

That’s not our problem. Not unless you are inclined to worry about the uncertain consequences of a bodyblow to a chaotic, corrupt and unstable economy in a country that has already invaded one nation and just happens to own a few thousand nuclear weapons.

But closer to home, there’s an echo of the financial crisis that caused the painful recession of 2007-09, Duy wrote on his Fed Watch blog.

“Back at the Federal Reserve ranch, a fascinating experiment is underway. Have policymakers been successful in insulating the financial sector from these kinds of shocks? There will be losses, but will those losses cascade throughout the financial sector and into the real economy, or will they be contained?”

A question that cannot yet be answered: What if the near-zero interest rates that the Fed has provided these past few years have created a kind of bubble in U.S. energy, with large amounts of “high-yield energy sector debt”?

No one seems to be quite sure how much of that debt is behind the huge boom in fracking and other new oil production in the United States. So what if the holders of that debt are suddenly unable to make payments because the fall in prices leaves them cash-starved?

Well, maybe it’s a minor issue here. In which case, it’s just a problem for small oil producers.

And that Putin fellow, of course.

Duy says that the Fed’s rate-setting committee will likely be thinking about the issue carefully when it meets this week. The crisis in Russia — and in the American oil lands — could factor into the Fed’s decisions on when to raise rates.

And how much.