Perry Glasser

DEFLATION, OIL PANIC, AND THE SKIDS #2

In Business, Economics, Economy, EDUCATION, Finance on January 8, 2015 at 10:05 am
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Is the past our future?

 

 

Dollar$ gazes at the skid in oil prices and asks:  Does the precipitous drop in oil prices presage a worldwide deflationary spiral? Is the world economy contracting so as to calcify economic activity?

In a word: No.

No one will be selling apples on the street any time soon.

 

Oil.

Oil is a commodity, which is to say, like lumber, cattle, gold, and copper, it comes out of the ground to be used to create more sophisticated products like jet fuel, gasoline, nylon, and plastic. Like all commodities, oil’s price is strictly set by supply and demand, a fact less true for many goods and service where supply and demand can be artificially manipulated.

Hatless in the cold.

Hatless in the cold.

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The entire Marketing industry, Prevaricating for Profit,  is devoted to creating false demand. When in 1933 Clark Gable wore no undershirt, the men’s underwear business went into a tailspin. John Kennedy in 1960 insisted on wearing no hat when he spoke at his presidential inauguration; the men’s hat industry has never recovered.

To be sure, hats and undershirts are not commodities. Their worth changes as a matter of fashion, not supply and demand.

OPEC

OPEC is the international oil cartel that has controlled oil’s supply for a generation, but the game changer is a recent innovation. Fracking, it turns out, is cheap enough and ideal in north central United States and southern Canada.

The cartel is losing its grip. The US is going from oil importer to oil exporter. To compete for those petro-dollars, OPEC and especially Saudi Arabia can no longer manipulate supply, but pumped as much as it could. Supply soared. Oil has become a glut on the market.

But at $40 per barrel, fracking becomes uneconomic.  Make no mistake, OPEC would like to see a price for oil that once again leaves OPEC as the only game in town. If that means bankrupting oil exporters not part of the cartel, such as Russia, so be it.

Bye-Bye Putin!

Winners in a Price War

It’s an old-fashioned price war, nothing more. As with all price wars, consumers benefit. Estimates put as much as $1,500 per year in the pockets of ordinary American citizens.

Never forget that the US economy is consumer driven—we like to spend on stuff because we are blessed to be in a places where there is stuff to buy. Expect discretionary products to fly out of stores. That new refrigerator is coming home soon.

The demand for stuff made in the USA will increase in the USA; expect hiring. Elsewhere, not so much because that strong dollar will make US goods seem expensive.

When you read dry-mouthed dire predictions of European disaster because hard-working Germans are tired of supporting spend-thrift Greeks, remember that the GDP of Greece is about 25 percent of New Jersey’s GDP. The drama is interesting, but the world economy is not going down any drain in Athens.

Since the US is an oil exporter, the US dollar grows stronger every day. Would you rather own dollars or euros?  You can’t pay for US oil with euros–it’s really not a choice. For the American consumer, tourist destinations overseas that were prohibitively expensive last year are going to seem to be on sale. Book the flight! Greece needs you money!

Big US oil consumers can lower their prices and still make big profits. Airlines and cruise lines will soon compete on price, instead of competing on service.

Losers.

What’s that Binky? You ask who are the losers? You ask why the stock market plummets with  the price of oil?

Well, oil companies aren’t happy. Along with Big Oil  the losers are the very rich, the institutions and people that had been positioned to enjoy high oil prices. Sheiks and hedge funds are madly selling to gather cash, the better to buy US stocks  when they believe oil prices have bottomed, which will be about $43 per barrel which is where OPEC can comfortably reinstate its hegemony. Much higher than that, and North Dakota gets rich–again.

So the stock market plunge does not presage a deflation spiral, but it seem that for a while we can expect a new set of winners.

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  1. The U.S. Banks could also be losers, small oil companies are going to default on their loans, Russia could default on their U.S. Dollar debt. Bank’s trading desks could also lose a bundle on oil futures contracts.

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