Falling Oil Prices

[Gene Frenkle]

This year's sky-high oil prices are partly responsible for the drop. Since oil hit $100 a barrel for the first time early this year, Americans (who consume one-quarter of the world's energy) began cutting back. When gas began selling above $4 a gallon, American consumers made "a psychological shift into the sense of crisis and a sense of permanence," says Greg Priddy, oil analyst for the Eurasia Group in Washington. Instead of believing that gas prices would finally fall again, many began changing their daily habits — they started driving the smaller car in a two-car garage or consolidating shopping trips. That has meant a huge slump in Americans' gas use. Even before the market meltdown, Americans consumed 800,000 barrels of oil a day less during the first half of this year than the same period last year. As demand fell, so did prices, and as prices have fallen, investors have begun pulling money out of the oil market, fearing a collapse, says Leila Benali, an expert on Middle East oil for the Cambridge Energy Research Associates in Paris, adding: "People are getting nervous about demand next year. There is talk of a global recession."

 

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For some countries there is a fear far greater than an economic recession: political turmoil. Iran, which earns 80% of its revenues from oil exports, set this year's budget on the assumption that oil would trade at $90 a barrel — a figure which seemed conservatively low until recently, but which is now above the world price. "If the price stays there a while Iran would cut spending," Priddy says. That might include cutting heavy gas subsidies for Iranian drivers, who have rioted in the past when the government tried to ration gas or raise the price at the pump. Hugo Chavez could face similar problems in Venezuela if oil prices drop below $75 a barrel — the rate at which the country calculated this year's budget. The problems lower prices could cause in those countries could be more visceral than those posed so far by the current financial upheaval.

http://www.time.com/time/business/article/...1849215,00.html

 

I think it's kind of ironic that two of the countries that consistently seem to spout 'Death to America' and other such crap are being directly affected by the lack of consumption of their product by the infidel American consumer. I don't understand all of the implications of this on the global economy, but strictly as a visceral gut reaction it feels pretty good to stick it to Iran and Venezuela.

 

How does this hurt us? What am I missing here?

[JimBob2232]

http://www.time.com/time/business/article/...1849215,00.html

 

I think it's kind of ironic that two of the countries that consistently seem to spout 'Death to America' and other such crap are being directly affected by the lack of consumption of their product by the infidel American consumer. I don't understand all of the implications of this on the global economy, but strictly as a visceral gut reaction it feels pretty good to stick it to Iran and Venezuela.

 

How does this hurt us? What am I missing here?

 

While clearly lower gas prices are good for our economy (on the surface), but the reason they are low is cause for great concern. Demand is weakening, not because of some great permanent shift towards an alternative fuel source, but because the world economy is in great stress right now and people fear that will in turn hurt demand. People will curb travel plans, people will stop "luxury" driving. Demand for goods and services will decrease thus reducing the demand transporting those goods.

 

The fact that countries like Iran and Venezuela have economies directly tied to the United States should be a concern in itself. If it takes a crisis in America to hurt their economy, that is a problem, because at the same time, a booming US economy would be a booming economy in their parts of the world...and few would agree they would use this new found wealth to foster peace and prosperity for their people.

 

So...bottom line...yes oil prices are low, and that is a good thing...that is the one part of the "perfect storm" which has not yet happened. Although, with the Fed lowering interest rates, and other factors, I suspect the dollar will begin to fall at some point...and we will be back to $4/gallon gasoline.

 

I dont think there is much benefit about rejoicing that Iran and Venezuela are hurting as well right now....

[SD Jarhead]

While clearly lower gas prices are good for our economy (on the surface), but the reason they are low is cause for great concern. Demand is weakening, not because of some great permanent shift towards an alternative fuel source, but because the world economy is in great stress right now and people fear that will in turn hurt demand. People will curb travel plans, people will stop "luxury" driving. Demand for goods and services will decrease thus reducing the demand transporting those goods.

 

The fact that countries like Iran and Venezuela have economies directly tied to the United States should be a concern in itself. If it takes a crisis in America to hurt their economy, that is a problem, because at the same time, a booming US economy would be a booming economy in their parts of the world...and few would agree they would use this new found wealth to foster peace and prosperity for their people.

 

So...bottom line...yes oil prices are low, and that is a good thing...that is the one part of the "perfect storm" which has not yet happened. Although, with the Fed lowering interest rates, and other factors, I suspect the dollar will begin to fall at some point...and we will be back to $4/gallon gasoline.

 

I dont think there is much benefit about rejoicing that Iran and Venezuela are hurting as well right now....

 

This will only crank up the vitriol. In my opinion, this is why even with energy prices dropping we cannot take our eye off the ball WRT a coherrent energy policy. We must avoid the 60 second hot pockets mentality and move on from energy to the next missing white girl.

 

Also, I tend to agree with you- how long will the dollar remain strong?

[TPS]

While clearly lower gas prices are good for our economy (on the surface), but the reason they are low is cause for great concern. Demand is weakening, not because of some great permanent shift towards an alternative fuel source, but because the world economy is in great stress right now and people fear that will in turn hurt demand. People will curb travel plans, people will stop "luxury" driving. Demand for goods and services will decrease thus reducing the demand transporting those goods.

 

The fact that countries like Iran and Venezuela have economies directly tied to the United States should be a concern in itself. If it takes a crisis in America to hurt their economy, that is a problem, because at the same time, a booming US economy would be a booming economy in their parts of the world...and few would agree they would use this new found wealth to foster peace and prosperity for their people.

 

So...bottom line...yes oil prices are low, and that is a good thing...that is the one part of the "perfect storm" which has not yet happened. Although, with the Fed lowering interest rates, and other factors, I suspect the dollar will begin to fall at some point...and we will be back to $4/gallon gasoline.

 

I dont think there is much benefit about rejoicing that Iran and Venezuela are hurting as well right now....

Oil is down for several reasons. Here's my list:

- $4/gal gas changed habits and reduced demand.

- the slowing US economy has reduced demand, and now a slowing global economy.

- The acceleration of the financial crisis had speculators (IBs and HFs) unwinding their positions in a scramble to increase capital.

- And, one of the strategies used by speculators was to go long on oil and short on the $, so that any fall in the $ was an impetus to take more long positions in oil (the argument made was that the $ would fall on increased inflation, and oil was the hedge). The financial crisis has caused a "flight to the $", so the $ strengthening has reversed the effect.

 

Once we get passed this crisis, speculators in commodity futures need to be reined in. Not saying speculators need to be eliminated, rather like the regulated exchanges, there need to be limits on the quantity of contracts they can buy. If HFs and others want to "invest" in commodities, they should purchase the stock of such firms, not try to use the futures markets as a short-term profit machine.

[JimBob2232]

This will only crank up the vitriol. In my opinion, this is why even with energy prices dropping we cannot take our eye off the ball WRT a coherrent energy policy. We must avoid the 60 second hot pockets mentality and move on from energy to the next missing white girl.

 

Also, I tend to agree with you- how long will the dollar remain strong?

 

I dont know how long the dollar will remain strong, but I do know one thing. The dollar's strength is relative to the strength of other countries currencies. We (America) created this problem, but we are not the only ones suffering. Our currency is becoming stronger vs. other currencies (brittish pound, euro, canadian $, etc.).

 

So, while the European countries are doing everything in their power to decrease the value of their currency, so are we. it becomes a race to see how can devalue their currency most effectively and fastest. Bailouts, lower federal funds rates, rescue packages, stimulus packages...all these things devalue our currency.