None are denying the spectacular drop in oil prices, though folk argue about the cause. And some wonder why the retail gasoline price at the pump has not dropped at the same rate.
Two explanations for the price drop stand out and seem likely: One is the war against fracking conducted by the Gulf Arabs. The other is the economic slowdown in the worlds’ top consumer of imported oil, China. Both seem to fit.
OPEC and especially Saudi Arabia opened their oil spigots wide; the production increase dropped the market price. China’s slowing economy has purchased less, adding to supply and reducing demand. Result: Cheap oil, at least while production continues at prior rates.
The dominoes proceed; as less oil is purchased, the oil inventory piles up, oil producers cut back and lay off workers and economies must adjust. China cut back because it was slowing, reflecting its export-heavy pattern. That means, its customers were buying less. And that means, the world economy is slowing. Or so we suppose.That has repercussions.
Canada plans negative rates (Paying bankers to hold your money!) as its oil patch dies. Its new Left wing government will flood its economy with magic money as did the U.S. Federal Reserve from 2008. You should decide for yourself, how much a cure for vanishing sales that has been. And nor is it only Canada seeing world trade slowing.
Stocks are falling along with the oil price. That reinforces the influence of declining business along with the oil price. Trillions of market value have disappeared as stocks have dropped in just the last few days. Investors are withdrawing their money to protect it. That is a fear reaction; if it continues for long, it may become a rout, a market crash. Channeling 2008 — and 1929?
Their is one more factor to consider in unraveling this spaghetti: Saudi Arabia. If its oil war on fracking is the main drive of today’s economic decline, we would expect Saudi finances to be strong enough to sustain the situation. But the country is beginning to strain its own resources via reduced oil income. Its reserves are coming under pressure. Saudi political stability rests upon using oil money to support the population; it cannot afford to let that diminish too far for too long. That suggest that it is not in control of the situation it faces.
It is a given that most of the world governments are spending at an unsustainable level. That is what deficits amount to, and deficits predominate worldwide. That amounts to a political bluff. Perhaps the combination of the Saudi’s oil war and a slowing China amount to calling that bluff? In the U.S. with a Trumped-up presidential wild card added, those should make for an interesting 2016.