Who doesn't like low gas prices at the pump? Economists get positively giddy at the increased discretionary income for consumers, when they pay less at the pump. But, enough already! At some point, the long term damage exceeds the short term pleasure. Take a look at this chart:
There has been a decisive breakout to the downside. In other words, the past offers little or no guidance for the future. We all know the reasons for this "brave new world." First, demand increases has slowed due to improved car efficiency. Second, there have been several major new oil fields, increasing supply. Third and a big one, fracking in the U.S. has made us the world's greatest oil producer again, stripping OPEC of its power. There was a time when the mere threat of a war in the Middle East would have driven up the price of oil. Now, not even a good old-fashioned shooting war will help.
Last week, OPEC had the opportunity to reduce supply but chose not to do so, because it would reduce their income. OPEC is now impotent. Saudi Arabia is no longer the "swing-producer." The United States is!
But, the point is -- oil prices have become TOO low. Houston and other cities are getting crushed. Houston is the only major city in the country with an increasing foreclosure rate. I know that pompous, blowhard Texans don't get much sympathy, but we will soon see huge write-offs in banks, which decreases their ability to lend to healthy industries. Master Limited Partnerships (MLPs), which make their income from rent charged to move oil or gas thru their pipelines, have gotten crushed in the stock market, even though their income is unchanged. Income investors have become overly frightened. Major oil companies have been safe dividend producers for decades, but there is now legitimate worry that those dividends will be reduced. The instability of oil prices is spilling over into the banking industry and the stock market. As the damage spills into increased default rates for the many bonds issued by fracking companies, the "high-yield" bond market will get hurt even worse!
Non-serious oil watchers interpret the fall in oil prices as evidence that worldwide demand is falling, because worldwide economic growth is falling. I believe the increased supply is far more relevant than any decreasing demand.
This is a time for the federal government to add to the National Petroleum Reserve, while prices are low, with the side benefit of stabilizing the dangerously low price of this important commodity. Beyond that small, temporary effort, there is little any government can do.
The brokerage firm of Raymond James has a good track record predicting such things, and they just predicted oil prices have hit bottom. I hope they are right!
The brokerage firm of Raymond James has a good track record predicting such things, and they just predicted oil prices have hit bottom. I hope they are right!
There is too little pain at the pump . . . we need more pain! It will be good for us!!
