Folks like T. Boone Pickens are telling us that oil will hit its all-time $145/barrel within three years ($75.00 oil by the end of 2009, $80 to $85 per barrel as an average price for 2010). And it sure looked like we were heading there after oil bottomed out at $33/barrel, when in a few short months, the price of oil more than doubled. As the government tried to cast bad news (unemployment was rising to horrible levels) as good news (unemployment is not growing quite as fast as it was a month ago), trying to suggest that we are hitting bottom (even as home sales, home prices, the number of employed Americans, the wages of the employed, retail sales, etc. continue to erode to new depths), speculators bid up the price of oil in anticipation of a “recovery.”
The stock market was soaring (however briefly) in yet another bear rally, when the harsh reality finally struck home: we are nowhere near anything remotely like a recovery. We may be sliding more slowly, but we are sliding. Credit markets are frozen more solidly than when the bank stimulus checks were handed out, commercial real estate is plunging and credit card defaults are soaring. Losing jobs and losing consumer activity in the marketplace (consumer activity is 70% of the economy) is not growth or recovery.
Even Wall Street guru Warren Buffet, in an interview on ABC’s Good Morning America on July 9th, noted that the balance of 2009 was likely going to be “rough,” and that the U.S. probably needs another large federal stimulus package to finish the job that the first package has barely started. He likened the first stimulus bill to a half a tablet of Viagra and having a bunch of candy mixed in. He might stand to benefit in the decline in the dollar that might accompany such a second hit to our humongous deficit, but he’s clearly not tooting the recovery horn.
True the International Monetary Fund, in their mid-year report, adjusted their prediction of global contraction from 1.4% to 1.3%, that the 2009 contraction for the United States will be 2.8% (versus an average from the advanced economies of 3.8%) and projecting very slight growth for the U.S. in 2010 of 0.8%. But we are still contracting! Look at the IMF’s numbers for China during this turmoil: 7.5% growth in 2009, and 8.5% in 2010. The emerging nations are where the action is; global growth is projected to hit 2.5% but not because of the Western economies.
So we get back to the price of oil. I wouldn’t count on its plunging anytime soon, but it could fall back down to $50/barrel according to some. It seems that OPEC has been pretty effective in keeping its member states at reducing oil supplies to keep prices higher than demand conditions might otherwise dictate, but there are signs that the 80% compliance (to reduced production) of OPEC states might be falling, down to 75% according to a report in the July 9th New York Times, signs of a potential weakening in the price of oil.
Bottom line: people don’t consume more oil when they don’t drive or travel as much, when factories do not manufacture at the same levels, when shipments of goods are reduced. You may see spikes in the price as speculators think some corner or another is being turned, but use common sense. If you see lighter traffic in your home town, see continuous sales as stores try and dump inventory, take a guess what that means to demand for petroleum-based products.
In a strange way, a bona fide increase in the price of oil based on a bona fide increase in demand is actually a good thing. It means stuff is moving again, folks are driving and traveling, factories are drawing power and making stuff. Until we see these signs for ourselves, we are just being lubricated with political spin about a bottoming out that is still in our future… a bottoming out that must precede any so-called recovery, however snail-like it may become.
I’m Peter Dekom, and I approve this message.
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