Note also that the negative wealth effect centers on the asset owner, not the asset itself. Florida doesn’t produce any oil that I know of, but people made fortunes in oil and moved to Palm Beach. Since their fortunes are now smaller, the Palm Beach economy will doubtless feel some impact.

While the US is feeling more pain this time, we are not the only ones. The oil-wealth wipeout is causing angst in Saudi Arabia, Indonesia, Russia, Brazil, Venezuela, Nigeria, and everywhere else oil is produced. Some of those places depend heavily on oil revenue that is now running at the lowest pace in more than a decade. Commodity-producing nations such as Brazil, Canada, and Australia are under similar pressures.

The negative wealth effect works on governments as well as individuals. Saudi Arabia is in serious belt-tightening mode. So is Russia. Both nations are also engaged in ongoing military actions (in Yemen and Syria, respectively) that are consuming resources. Every oil-exporting nation is in peril, some more than others – and therefore they are liquidating whatever assets they can.

Sovereign wealth funds (SWFs) have been huge market players over the last decade. Their steady accumulation of assets has had a lot to do with rising stock, bond, commodity, and real estate prices. The loss of that buying interest has to be negative for asset prices unless someone else picks up the slack. I don’t know who that would be.

Note also that the sovereign wealth funds can have a huge impact even if they don’t sell anything. All they have to do is stop buying. That alone could drop the hammer on market segments that grew dependent on the SWF activity. As an old mentor told me, it takes a lot of buying to create a bull market; but for a bear market to get started, people don’t have to sell; they just have to stop buying.

Coup de Grâce?

We don’t know when or if the oil price will recover. Some highly respected analysts think it will stay in a range of roughly $30 to $60, the high end being the point where currently capped-off supplies come back online. If so, then we are now at the low end and could see a big bounce.

Even a huge bounce might not make much difference. A jump from $30 back to $50 would represent a 67% rally for crude oil. That’s several years’ worth of bull market gains – but oil at $50 would still leave many reserve owners with a stranded asset.

Something else is happening, too. Renewable energy technologies have made huge strides in recent years. Costs have dropped and are still falling, even without the motivation of high fossil fuel prices. This is happening partly because governments want everyone to reduce carbon emissions. It won’t be good for oil prices if they get their way.

For example, consider this headline from the normally staid Smithsonian magazine.

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