Something is bugging me and has been for a while. The supply/demand issue in oil isn’t adding up. Demand is said to have dipped while supply has been kept steady. On the face of it that makes perfect sense as to why prices have fallen. When economic activity picks up so does oil demand, and vice versa. It’s one of those constants.
My problem is why demand is supposedly dipping now when it should have been dipping over a year ago when economic growth flatlined? Take out the geopolitical premium (Middle East etc) from oil over the last year or so and we were still trading above $100.Even back then China was slowing, Europe was slowing, yet only now, in a fairly short space of time has the price fallen on demand and supply.
OECD highlights the dip in world oil demand: What, you can’t see it either?
The fall in oil has also hit inflation, and we know inflation is the big buzzword at the moment. Again, I have an issue with the warnings being attributed to the falls. There is virtually no risk when imported costs fall. For countries like the UK, Europe and Japan these falls are a potential lifesaver and economic booster. For producing countries like Canada it’s pain for the economy. For a country like America, where oil is produced, kept and used in house, it’s another positive. Falling inflation is a problem in Europe where growth is on the floor and the risk of deflation lingers but not in countries where there is decent economic activity. Europe has far too many structural problems and so the benefits of lower input costs doesn’t have such a positive benefit.
It also strikes me that the price moves in oil and inflation have come as QE has come to an end. We know the Fed wanted out of QE but they’ve never said it’s because they wanted to stop helping the economy and to let it stand on its own two feet. The US is recovering. It’s not going to hit the “boom” button anytime soon but it’s on the up. With QE finished how does the Fed continue to support the economy?
If you’re not seeing wages rise then the next best thing is to make peoples money go further.
Q1. What’s the best way to do that?
A. Force prices down.
Q2. What’s one of the easiest and most wide ranging areas you can do that?
A. Lower oil prices.
Making the cost of living cheaper is akin to giving a pay rise. If fuel, food and utilities cost you $500 per month last month and $450 per month this month, you’re $50 better off. That’s a 10% gain and easing in its simplest form.
Inflation is a dangerous and often untameable beast. We in the UK can do nothing when imported inflation falls just like we can do nothing when it rises. The economic benefits though are measurable when it goes in our favour. In the US they produce and use their own oil so they are in control. Yes producers may suffer from the price falls but the economy will start benefitting a great deal. Want an example?
The price of this years US thanksgiving dinner has risen by only 0.8%. Up just 37 cents for feeding a group of 10. Usual increases are between 1.5% – 2%. The slim rise even comes as the biggest ticket item, turkey, has seen production fall to the lowest level in 30 years. Even so, turkey prices have still fallen.
John Anderson, deputy chief economist at the American Farm Bureau Federation summed the situation up regarding the energy impact;
“Everything that is in your local grocery store got hauled in from something else. It’s used to keep warm things warm and cool things cool.”
This may sound a silly example but that’s how far reaching falls in energy prices are. It is evident in the price of food you put on your table, and how it got there.
The US Thanksgiving turkey: It didn’t drive itself into your oven
Not one Fed or government member has spoken about the fall in oil prices hurting the economy, and that’s from the worlds biggest producer. All we’ve heard is how the falls will help the consumer and with no wage rises coming anytime soon that’s telling.
The inflation ogre that people talk about is not as big a risk as they make out. Its stealth QE and it has a good chance of working as long as the envelope isn’t pushed to far. So if you find yourself $50 better off a month, think about how long that particular gravy train might last before you go out and blow it on a bigger turkey.
There is only one way to cook your turkey.
In just over an hour we’ll see whether inflation is going to give Americans an early Christmas boost to their wallets as we get the CPI data. It’s expected to hold at 1.7% in the y/y core and tick lower to 1.6% from 1.7% in the y/y headline. Month on month a fall of 0.1% vs +0.1% prior is forecast and a 0.1% gain in the core.
