The Energy Sector Could Undermine Itself

Credit crunch? What about the energy crunch? With the price of crude oil surging to a new record of $117 (U.S.) a barrel on April 18, we have to ask how much longer the world economy can hold up.

Soaring energy prices “could prove to be a larger threat to growth than the ongoing credit crisis,” declared institutional advisory BCA Research in an April 18 note to clients. It’s going to be deflationary: “with most of the G7 world already in a slump, high energy prices are an additional squeeze on spending power.” Ominously, they add:

“Bottom line: Both the severity and duration of the global business cycle downturn will inevitably be impacted by the evolution of the energy crunch. In turn, this will weigh on equity markets in the G7 countries.”

I have been bullish on natural gas for a while (see, for example, the Aug. 18 post, Playing the Natural Gas Cycle). But it’s beginning to look like the energy sector is going to undermine itself as high fuel prices dampen economic momentum.

Comments

[bryce v.miller]

SAUDIA ARABIA DOES NOT HAVE ENOIGH WATER TO GROW IT'S GRAIN, THEREFORE THEY LOOK TO OTHERS TO GROW GRAIN AND SELL IT TO THEM. LET'S ALL PUT A SUR CHARGE ON THE WATER USED TO GROW THE GRAIN WE SELL THEM TO OFF SET THE INFLATED PRICE OF THEIR OIL. DON'T DISTURB THE PRICE OF GRAIN.

[crowdofcheerleaders]

saudi arabia could probably straight out buy 100s of millions acres of grain fields with its cash.

[Malkiel]

Most oil use in the US is stuff that nobody's willing to do without--heat, ac, pleasure driving, deliveries to Walmart. The recession and gas prices combined will barely make a dent in that. And the Saudis aren't influencing the price, since they can no longer ramp up their production for technical reasons (not enough oil left to justify new drilling). The world's other people are tasting what we've had cheap all these years and we'll never get back to where we were before. Deal and move on...