Gas prices are really starting to creep me out



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 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.


  1. says

    There was an article on Daily Beast a few weeks ago theorizing the drop in oil prices is punishment for Putin- somebody talked the Saudis into burning some of their hoard of currency to put the hurt on Russia. Considering the ruble lately, this might make sense.

  2. says

    There was an article on Daily Beast a few weeks ago theorizing the drop in oil prices is punishment for Putin- somebody talked the Saudis into burning some of their hoard of currency to put the hurt on Russia. Considering the ruble lately, this might make sense.

    I saw that one, too, and it makes a fair bit of sense to me. It boosts our economy and has absolutely cratered theirs. It also puts huge pressure on all the other oil-producing economies and amounts to a hell of a shot across their bow.

  3. weatherwax says

    What are the odds that it is as simple as Saudi Arabia putting the hurt on Russia and the US oil industry? I’ve been thinking it’s just that simple, but it just occurred to me that might be problematic. Yes it will hurt, but as soon as the Saudis take the the pressure off, we’ll just go right back to pumping again.

    Your suggestion that someone has put the Saudis up to punishing Russia may have more to it. Or maybe they have other reasons. Like you said, they don’t give anything away.

    Thanks for the column. It’s nice to get info from someone who has an idea of what they’re talking about.

  4. Pen says

    Odd. Our news agencies in the UK have been reporting on this for some time. They say it’s due to the market being flooded in oil right now, especially because the US itself has increased its domestic production of oil and doesn’t have to buy so much.

  5. Trebuchet says

    I just Googled “Glenn Beck Oil Prices” and he seems to think it’s some sort of Obamunist plot. Of course it is! Just like it was when prices were going up.

  6. lorn says

    It seems likely that this is a confluence of issues, fracking for gas, oil sands, improved extraction methods for oil, a slump in Chinese use, … Likely Saudi Arabia (SA) is taking this time to hurt competing oil producers but they may also be taking suggestions from the US and/or playing out a political game. SA has long had a fear of Iran and what might happen if a Shia nation remained bellicose, and got nuclear weapons. Drop the price of oil and Iran gets squeezed, possibly squeezed enough to build on recent diplomatic advances to finally settle.

    The recent gestures to Cuba may be part of it. There is some talk of Cuban oil. If oil is high Cuba has reason to play hardball on terms for exploitation. If the price is down, and relations more relaxed with the US the US oil companies have more of a chance. Those oil refineries on the Gulf coast are just about close enough to handle oil from Cuban territorial waters. Using existing nearby plants is always more efficient than building new of hauling it great distances.

    This may also be part of an effort to punish Venezuela for its socialist leanings and try to turn it to the path of capitalism and worker exploitation.

    It also hurts Russia.

    Of course I agree that it is troubling. Big shifts in commodity pricing causes market confusion and inefficiencies. Cheap energy hurts wind and solar investments and takes the edge off conservation efforts. It is possible as signals for production and conservation get mis-timed we could easily slide into a boom-bust cycle where the prices go so low that producers shut down just as people need the energy, and then, starved for energy, prices go so high that there can be no economic expansion because nobody can afford to buy it. This would be like an atrial fibrillation of the energy markets. Lots of motion without much getting done.

    At the very least short term cheap gas will mean SUVs and large vehicles remain viable for a few more years. This could blow up in the face of people who buy and depend on them.

    There is also the tendency for people and nations under stress to take drastic actions. Russia, Iran, Venezuela, or anyone else pressured by this shift could act out and cause problems that are messy and expensive to fix. Rapid shifts in pricing of energy can cause other prices to fluctuate and rapidly changing prices leads to uncertainty, instability, desperation, fear and possible panic. None of that is likely to make soft landings and happy endings any more likely, except for those who have a whole lot of money on hand. They can exploit every hardship and shortage, shift money into and out of committees to make more money and generally surf the markets as the little people below them are parched or drown.

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