The Economic Consequences of Falling Oil Prices 9 comments
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I've maintained that rising oil prices put a significant burden on the U.S. economy in recent months. How much will falling oil prices help to alleviate those concerns?
Certainly rising gasoline prices were one factor in this year's plunging consumer confidence. With prices now falling, the Reuters/University of Michigan index of consumer sentiment is up slightly for the last two months. But it still has a long way to go before you'd describe consumers as upbeat.
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Falling oil prices also mean immediate relief on inflation. The energy price decreases over the last two months should subtract a full percentage point from the 5.6% year-over-year CPI inflation reported by the BLS last week. But again it will take a lot more to bring headline inflation back to comfortable levels.
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Sometimes the stock market has taken lower inflation to be good news insofar as it gives the Fed breathing room to lower interest rates. But I have been skeptical of the Fed's ability to stimulate the economy with further rate cuts, and agree with Tim Duy that the main effect of falling oil prices is likely to be that the Fed holds a bit longer at the current 2% fed funds target before trying to make a move in either direction.
Nor do I expect falling oil prices to bring relief to U.S. automakers. The fleet of U.S. vehicles is inexorably going to be converting to more fuel-efficient models as old cars get replaced, and that's a big challenge given Detroit's traditional market niche.
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But really the key question for purposes of assessing the economic consequences of falling oil prices is, Why did oil prices fall? To the extent that it is due to the increased global oil production that we've been anticipating ([1], [2]), that is unambiguously good news for an oil importer like the United States. But I'm persuaded that another key cause of oil's recent plunge has been economic weakness in Europe and Japan, which has meant both a stronger dollar and weaker global oil demand.
And weakness in global economic growth is a real threat to the U.S. economy. Exports are the one sector that seemed to keep the U.S. economy going in the second quarter. If you kick out the leg of a one-legged stool, prospects for stability are not too great.
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This article has 9 comments:
Thanks for info,I have no opinion about Oil prices but my short October calls and puts already made 6500$ since Friday while Oil didn't decided yet what to do.
Focus on trading ranges,buy and sell hell out of this liquid market which daily charts look like child's caricature.
If even child with Down syndrome can draw this up/down lines why most futures traders lose money?Maybe it is because they read and watch too many Bloomberg/CNBC stories while pits roll.
Enjoyed your thoughtful post.
Our auto fleet's getting older, certainly, 9+ years at last count. Someone's going to make alot of money selling vehicles one day, but I haven't a clue who that might be. Seems like the Japanese Big 3 are in the driver's seat, but they're just as scared as everyone else.
As a result of the falling dollar, it appears the U.S. has quietlly become something of an export powerhouse. I've heard we've doubled foreign sales in the past 12 years. If true, that speaks very well for American competitiveness in the new world economy.
I am concerned about our future going forward, though. While there are always storm clouds on the horizon, it seems like we have more than our share presently.
Chief among my concerns is the price of energy. Cheap power built the economic engine that fuels our economy. Without it, I see a scenario for more inflation, unemployment and armed conflicts ahead.
How we adapt to this new economic axiom will be the key to our future. It will be a stern test of America's continued ability to overcome formidable obstacles to maintain our prosperity.
While several states are obvious winners, like the old oil patch (TX, LA, OK, WV), the new oil patch (UT, WY, CO, ND, MT), the exporters (CA, OR, WA, IA, IL, IN, AL and others), and "defensers" (VA, ME and others), it's the laggards that concern me.
MI and OH, for instance, seem incapable of turning their economies around. Some of this can be attributable to their reliance on a single industry (vehicles), and more to their (nanny-state) political choices.
Or maybe I'm being too critical, and this is simply a snapshot of "creative destruction" and the "invisible hand" at work once more.
I hope so.
First they turn out their all but certain presidential winner for a rookie Senator. Then they continue to obfuscate (and go on vacation!) over offshore oil and gas exploration, which an astonishing 80% of Americans support in the face of $4 gasoline. (A sure political winner if there ever was one!)
And, lo and behold, rather than back up a bit and deftly turn around on this make or break issue, they just dig themselves in deeper. Even if they somehow succeed in getting to an "end game," the moratoria on OCS exploration expire on Oct. 1, barely a month before the national election!
Do you think McCain and his underdog cohorts aren't salivating over the prospect of shutting down the federal government then to force a clean vote on more domestic oil and gas exploration? Indeed, it may already be too late for the Democrats to avert this political catastrophe. And yet they just move blithely forward, seemingly oblivious to the consequences and obvious results.
It's almost as if a Higher Power decided to intervene in our behalf, and not much less remarkable than that!
Heck, maybe we can even get the Chinese and Cubans to formally announce their intention to drill for oil off Florida between now and election day. Who says their isn't Providence?
Risk does exist for a 'black swan' event based on uncontrollable geopolitical factors. Personally, I do not live my life in fear of such things and do have back-up plans.
Outside of this, is a Washington that is heavily manipulating markets. Half my time is understanding the deal-making from power brokers on the Hill. This form of government creates a broken free market but it's either profit by it or go bankrupt.
There are other matters of principle and catalysts of government change myself and others are working on. You may be as well and no doubt more consolidation in these efforts will be required in the future. Some of us may need to jump in the shark pool of mental dwarves on the Hill in 2012. I may be amoungst them but I look at that as I would look at military service being in the Army for example.
I assume voter revolution in 2012. In-between I expect a socialist/fascist style operating government and US market in the next four years no matter which political party comes into or retains power. Emerging markets, exports, consumer healthcare, efficiency technology, alternative energy offers some hedges and buying opportunities. I am expecting an emergence of the next Bull in 2013 but not before.
en.wikipedia.org/wiki/...
> jack