Crossposted to Daily Kos — good discussion in comments there with poll — DS
Gas is at 1.74/gal down the street. That’s a huge, huge drop in a really short period of time. I’ve skimmed back on commodity reports and there’s nothing beyond the usual bear-bull financial entertainment fluff predicting it, not until the move started.
Not that I’m complaining: when a blogger is reduced to begging his readership for holiday donations, any relief helps. This is the last night of that, I’m short about a hundred bucks, and just to give you an idea what ads pay bloggers these days, my last ad based payout was $5.82. Please consider sending any leftover change you might have to Paypal via Darksydothemoon-at-aol.com. Even five bucks helps. You can also mail a check to my literary agent G. Scanlon FBO Stephen Andrew; 11512 Tincup Dr #109, Austin, TX 78750. Thanks again folks, it means a lot to me!
Back to the gas glut: here’s an anecdotal sign I picked up during my years as a portfolio manager: when ordinary people suddenly feel they’re experts, that’s a bad sign. I’m talking about people who are definitely not pros or even slightly knowledgeable, worse than ignorant, openly dangerous. I’m talking your uncle Bob Dunning-Kruger that I meet at a party, and instead of asking me after he finds out what I did he proceeds to lecture me with a superior nod-nod wink-wink air of contempt exactly what the market is going to do. Lately, when I mention my admittedly vague concerns over oil prices, people are quick to shut me down and reassure me with no shred of analytical reasoning whatsoever that this is a 100% positive thing that can’t possibly hurt anyone …. It may not be rigorously scientific, but that worries me, and folks I’m talking from experience, lots and lots of experience, on this one.
There is no doubt that we’re all enjoying a raise right now. It is widely felt. I understand the sunny optimism. Obama’s approval is up several solid points in just the last week, it’s hard to imagine what else could be driving that but gas prices. Which in itself should worry you, Obama has little executive control over gas prices and he hasn’t exerted any of that I’m aware of. Short of starting a respectable war in a large oil producing or large oil consuming region, about all a president can do is try to temporarily freeze prices in some very narrow, usually extreme circumstance, which hasn’t happened, or open the strategic reserves, which is mostly a symbolic move that also hasn’t happened.
Oil is at the heart of our entire global economy, the US in particular is scary vulnerable to the price of ancient caramelized alga. High prices and sudden spikes are notoriously bad, ask any of us who suffered through the 70s. But that doesn’t mean that crashing prices are always good forever. Higher prices are a major driver of inflation. Low prices with interest rates already rock bottom could actually trigger deflation. Sustained, pronounced deflation hasn’t happened in so long I think it’s fair to say no one knows what it might do. But just as an example, eventually wages would catch up, and there are fixed costs in life, like fixed rates on loans and existing coupon rates on bonds, long term rent contracts, collections repayment agreements for bankruptcy or past due retail debt, even long term options and forward pricing instruments, some hard or impossible to quickly renegotiate or refi that could get squeezed hard. There’s a lot of this paper out there. Trillions and trillions in face value. If just a small fraction defaults, the economy slows, oil could drop further, a novel feedback loop is born.
It would be ironic if what set off the global collapse some doomsayers write about and prep for was low oil prices, huh? If you want to wallow in real paranoia, deflation means the same amount of money buys more stuff. That means the really rich effectively get really richer without actually increasing their numerical networth. Maybe it’s some kind of conspiracy …
Another concern, everyone seems to accept without question that this is all OPEC, i.e., Saudi Arabia. And maybe it is. But those cats are tight lipped, we don’t really know what they’re up to or why. Saudi production strategy is a big time state secret, they’ll cut off heads by the gross for leaking that stuff, think of it as their version of US nuclear launch codes. So it might be more than OPEC, it might mean a growing, hidden recession of biblical proportions is brewing. My biggest fear would be Asia. China, Russia, and India are not exactly the most transparent governments and they’re not real famous for their stringent oversight and regulation.
An idea being discussed today is the effect this could have on ISIS. Those nutcases are controlling some production in Iraq. I don’t know what their production costs are. But knocking down prices would at least affect their profitability and possibly cause turmoil in the ranks when the cut for head honchos starts going down. ISIS is something the Saudis have every reason to be really worried about on every level.
And of course there’s the deal I blogged earlier this week. How our economies are way more intertwined than they were even a decade ago. Some nations have higher production costs than Saudi Arabia (High quality oil practically seeps out of the sand in some Middle East reservoirs) and oil is their only asset or their largest asset. We’re getting into prices that could bring some of those nations to their knees and spread to other places in unpredictable ways thanks to all kinds of combinations of sheer human dumbassery and good old fashion denial.
For now we’ve all got a few more bucks in our pockets to spend and that’s going to spur the economy. It might even set off a long suppressed boom. It’s about damn time! But what if this continues? Oil isn’t perfectly seasonally cyclical, but on average it doesn’t tend to move higher until late Spring, there’s time for it to go down more. What if it hits 30 bucks a barrel?
I’d say if that happens I’m going to be even more creeped out and you hard-nosed skeptics should start talking me off the ledge.