Oil Below 50: Why Won't We Just Face What's Going On With Crash in Oil Prices?
Oil has now dropped below 50, but it seems we don't want to face the potential ugly reality propelling this crash.
But what happens when we look at the flip side of the oil crash coin - that the price is collapsing because of a lack of demand? That's not going to support the thesis that the economy is strengthening.
OK, which is it: too much supply or too little demand? Remember, lack of demand will result in a build-up of inventories, creating a glut. We know that supply has increased as a result of rising production due to new sources of oil, specifically the oil being extracted by new fracking techniques. But does that account for oil dropping from $111 per barrel to $50 per barrel in less than one year? Just doing the math, a drop in price of over 50% signals that supplies more than doubled. But they haven't. And even if we consider that prices don't necessarily respond in mathematical lockstep to production volume, it seems more reasonable to consider that demand has probably slipped.
Given declining demand - a reasonable assumption - we should be focused on the degree of decline, the cause of it, whether it will continue, and for how long. I'm not saying we can easily find the answers here, although some of the answers aren't all that hard to ascertain. And I'm not saying that we can assure the pinpoint accuracy of any answers we find. But it's far better - far more reasonable - to seek those answers than to nod our heads in agreement with those who continually trumpet a growing U.S. economy, leading to a continuation of a rising stock market. I'm afraid collapsing oil prices tell a different story.
As for the supposed goose to the already growing economy that lower oil prices will engender, it's time we stopped dancing to that tune as well. If oil's price continues to decline, and layoffs in oil producing companies, as well as oil transport companies, pick up, we're almost certainly looking at higher unemployment. But more than the unemployment caused by oil's price collapse, just look at the $2 trillion in wealth that has been wiped out in only the last month or so and explain how those whose wealth has just declined by $2 trillion will cause increased economic activity, leading to a boom in the economy. Instead of inspiring confident economic activity, such losses more likely will prove to be deflationary as those who lose wealth pull back on spending, which may possibly lead to another recession. And what if those whose wealth is tied up in energy companies begin selling valuable stocks from their portfolios to make up for the shortfall caused by a decline in company earnings and cash flow, as well as a falling stock price?
No, I think it's time we started facing the fact that this decline, rather than being a boon to the economy, now signals a rocky economic start to 2015. The question is how rocky, will it continue, and will it possibly pick up steam on the down side.
Oil extended losses below $50 a barrel amid speculation that U.S. inventories will expand, deepening a global supply glut that’s driven prices to a five-year low....Most of the commentary gives the impression that the "glut" was created by an excess of supply. If the continuing crash results from excess supply, it allows the continuing positive view that the economy is strengthening - at least the U.S. economy.
The market faces “more problems” this year, according to Morgan Stanley, with surging output in Russia and Iraq contributing to a surplus that Qatar estimates at 2 million barrels a day.
But what happens when we look at the flip side of the oil crash coin - that the price is collapsing because of a lack of demand? That's not going to support the thesis that the economy is strengthening.
OK, which is it: too much supply or too little demand? Remember, lack of demand will result in a build-up of inventories, creating a glut. We know that supply has increased as a result of rising production due to new sources of oil, specifically the oil being extracted by new fracking techniques. But does that account for oil dropping from $111 per barrel to $50 per barrel in less than one year? Just doing the math, a drop in price of over 50% signals that supplies more than doubled. But they haven't. And even if we consider that prices don't necessarily respond in mathematical lockstep to production volume, it seems more reasonable to consider that demand has probably slipped.
Given declining demand - a reasonable assumption - we should be focused on the degree of decline, the cause of it, whether it will continue, and for how long. I'm not saying we can easily find the answers here, although some of the answers aren't all that hard to ascertain. And I'm not saying that we can assure the pinpoint accuracy of any answers we find. But it's far better - far more reasonable - to seek those answers than to nod our heads in agreement with those who continually trumpet a growing U.S. economy, leading to a continuation of a rising stock market. I'm afraid collapsing oil prices tell a different story.
As for the supposed goose to the already growing economy that lower oil prices will engender, it's time we stopped dancing to that tune as well. If oil's price continues to decline, and layoffs in oil producing companies, as well as oil transport companies, pick up, we're almost certainly looking at higher unemployment. But more than the unemployment caused by oil's price collapse, just look at the $2 trillion in wealth that has been wiped out in only the last month or so and explain how those whose wealth has just declined by $2 trillion will cause increased economic activity, leading to a boom in the economy. Instead of inspiring confident economic activity, such losses more likely will prove to be deflationary as those who lose wealth pull back on spending, which may possibly lead to another recession. And what if those whose wealth is tied up in energy companies begin selling valuable stocks from their portfolios to make up for the shortfall caused by a decline in company earnings and cash flow, as well as a falling stock price?
No, I think it's time we started facing the fact that this decline, rather than being a boon to the economy, now signals a rocky economic start to 2015. The question is how rocky, will it continue, and will it possibly pick up steam on the down side.
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