Oil prices tanking, why isn't the economy soaring?

One of the reasons (which has been partially alluded to above) is that during the Great Recession, the Energy Industry was the only one really booming. Now, oil is a game where much more then just the big oil copamies are effected, unlike say the aviation industry. One of the biggest increase in U.S Manufacturing has been in machinary which is related to Oilfields and Oil and gas services. When times were good, then you has companys making news digs and prospecting and that meant that more and more equipment was being made for new fields and present equipment was wearing out faster (due to use) which mean more spares and maintenance monies. With the downturn in that, that market has taken a huge hit.There was and is also a huge market which services the oil industry from providing trucks, on site security, infrastructure, accomodation etc etc and they have taken a similar hit.

Lower oil prices take some time to take effect because oil stocks are typically bought months in advance. At the same time lower oil orices are not necessarily a boon to your electric company.Generation costs are only a part of your electric bill; you also have to add trasmission and distribution costs, which may actually go up, line losses and other charges.

With all due respect, I don’t see why I should take the word of an anonymous poster on a MB over the professionals whose job it is to understand such things.

Also, Stiglitz and others have been pointing out that the U.S is going to suffer as decaying infrastructure begins to bite; one of the ways that the Clinton era surpluses were created was by deferring investments into infrastructure improvement, and Obama (and Bush II) heavy increase of the debt ws not spent on infrastructure.

Essentially all commodities have crashed at around the same time. While each is subject to its own market dynamics, there’s almost certainly a common element involved. The common element is most likely a slowdown in China. China is either the largest consumer or has been the largest source of consumption growth in nearly all commodities.

Speaking about oil specifically, of course its not as simple as OPEC trying to flood the market to bankrupt has cost producers. The only member of OPEC that matters is Saudi Arabia. They are the largest exporter and also the only member with spare capacity (excepting current outages from countries like Iran and Libya).

OPEC could certainly eliminate the current supply/demand imbalance if they wanted to. Typically that would involve a coordinated cut amongst the member countries. Also, they have recently (and in the past) asked for involvement from major non-members, most notably Russia. The problem is that what usually happens is that they all agree on a coordinated cut and then everyone cheats on the agreed upon quotas except for Saudi Arabia. Saudi Arabia is not willing to allow that to happen again. They also know that even if they prop up prices by cutting production, they will just have to do it again as non-OPEC sources will be able to keep growing production if prices are propped up. That simply results in lost market share by OPEC. They don’t want to repeat the mistakes they made in the 1980s and 1990s.

So, there hasn’t been enough time, and pessimism is keeping people from jumping the gun. Could be worse. As long as the predictions of continued low prices hold out we should the next president should be starting on a high note, at least for energy costs. I can understand the pessimism, I have a feeling we’ve already pissed away any benefits that can result.

Of note, I do not believe the predictions of continued low oil prices will actually happen. I think the market will come back into balance sometime later this year and that prices will rise to $60s later this year and into the $70s during 2017.

Gas prices are much more heavily dependent on weather. I would tend to expect weather to be more normal in winter 2016/2017 so prices should rise back up close to $3.50 or so sometime in 2017. Gas prices will be low for the remainder of 2016 unless something changes on the weather front.

Thanks for your kind words.

Reduction in GDP results in less demand which results in lower oil prices. I’m not sure I see how lower oil prices lead to an increase in GDP in that chart. Not that I doubt it, I just don’t see it.

As for California prices, though we have a refinery outage (we always have some refinery outage when prices get too low) gas prices are still well below where they were 18 months ago. But there might be a factor of increase in demand as our employment picture continues to improve. That’s relative to historical California prices - as you said we are our own market and thus have higher prices (and reduced smog - I’m not complaining.)

This is superficial and basedon some very large but not well based presumptions.

The boom may be that the economies are not falling more, the downside may be greater without the higher prices.

There are many confounding factors and economies with the signifcantly greater energy efficiency than in the past (as all the developed economies to one degree or another show) should show less reaction, so the ideas of impact as based on 1970s and 1980s memories will be naively wrong.

I did not claim that they intentionally caused the prices to fall, just that they (well really Saudi Arabia) are intentionally keeping prices low. It is a very common subject on CBC radio and is not an extreme view. They will pump as fast as they can to use the commodity price crash to prevent development of more expensive sources so that when prices do rise again they have more of a market share.

You don’t have to. You could have looked at the sources I linked to in my previous post, which you evidently ignored.

It’s a common belief that futures prices reflect beliefs about the future price of the underlying commodity. Because of arbitrage between the spot and future contracts, that is not really the case. The difference between long futures and spot rates are more a reflection of interest rates than expected changes in commodity prices.

Saudi Arabia is doing what every oil producer has already done, selling as much as they can pump as fast as they can pump it. If the US passed a law that cut the amount we pump in half, global prices would skyrocket. The US will not do that because cutting prices so the price will go up hurts your pocketbook while helping your competitors. The same is true of Saudi Arabia, they need to keep their princes in hookers and blow and their shiite population down. To do these things takes money and there is no way they are going to sacrifice the money they could make so countries like Iran and Russia could make more money. I think Saudi Arabia’s spare capacity has been a myth for at least 25 years.

I know it’s more complex than that. I’m trying to get at the specific reasons these simple concepts don’t apply. Certainly the world economy is not rock steady save for oil and gas prices, as they fall we face new costs elsewhere. And while energy efficiency reduces the percentage of the economy energy dollars it’s still a significant amount.


The curves seem to move in lockstep with each other. In other words, 18 months after oil prices fall, GDP seems to rise.

I don’t understand what you are saying. Do you not think that the shutting in of roughly 10% of California’s refining capacity has resulted in increased refinery profit margins resulting in smaller reductions to fuel pricing than the rest of the country has experienced?

They’re not intentionally keeping prices low. They are intentionally not artificially propping up prices. They are intentionally letting the market come back into balance on its own. They are intentionally not acting like a cartel.

For several years now, economists have been betting that the Chinese economy would keep growing by leaps & bounds for many years to come. But it turns out that China has to deal with the same economic cycles that everyone else does. Basically, there was a “China bubble” that is now bursting.

Well, they had some spare capacity since they’ve increased production by roughly 1 mmbbl/d over the past year or so. Having said that, you’re basically right. They’re not going to unilaterally cut production just to lose market share and still probably end up with a situation where the market is oversupplied.

I agree that futures prices aren’t very good forecasters, but they’re not just a reflection of interest rates. How would you ever get a backwardated curve absent negative interest rates? Why would they switch from contango to backwardation in the same kind of interest rate environment?

I just read my post (as quoted by you) and thought, “that guy’s a snarky jerk,” until I realized it was me. :eek: So lest there was any confusion, I was not being snarky. I consider you one of our more valuable posters.