PBS NewsHour on lower oil prices

Gas prices have continued to fall since yesterday's WOOD-TV on lower gas prices.  The neighborhood stations blew right through the $2.35 and $2.32 price levels I expected to $2.29, lower than I would have forecast for this week.  I'd be tempted to call a low for the year, but there is still another week that prices could fall before they historically begin to rise again.

PBS NewsHour has noticed the precipitous decline in oil prices and analyzed the implications of them in Is there a bad side to the recent plunge in oil prices?

Over the last few weeks, the price of oil has dropped dramatically. While this may be good news for consumers, for Wall Street the numbers tell a different story. The Wall Street Journal's Nick Timiraos joins Hari Sreenivasan from Washington, D.C. to help make sense of the downward trend.

The result looks like the beginning of the popping of shale oil bubble forecast by Kunstler in The Instability Express and Crash-O-Matic Finance and Greer in Dark Age America: The Hour of the Knife.  I summed up my take on the financial chaos that could result in a comment at Kunstler's blog.

[T]he weakness in oil is pulling the market down.  What is good news for consumers is not good for investors, and I suspect that the increased spending on consumer goods may not be enough to make up for the bursting of the shale oil bubble.  This is not good, as Wall Street has a way of inflicting its pain on Main Street.

There are other moving parts that intersect with the falling price of crude oil, as PBS NewsHour explains in Sanctions, cheap oil take toll on Russian ruble.

Russia's central bank hiked a key interest rate nearly 7 points overnight in a dramatic move to stabilize the economy. The ruble has lost 60 percent of its value since January, and Russians have been feeling the economic pinch of inflation. Jeffrey Brown reports how the falling price of oil and Western sanctions have hurt the Russian economy.

Hurting Russia and Iran might be a good thing from the perspective of both the U.S. and Saudi Arabia, but it might come at a high price in terms of loss of American oil production.  Elaine Meinel Supkis thinks this will backfire with Russia coming out OK and the U.S. and Saudi Arabia harming themselves instead, but I think she's lost it and she is too wedded to a model of the world that doesn't work.

As for what I think will harm us, follow over the jump.

In Saudi Arabia opens a trap door on oil prices, I described what would be the reaction to the current low price of oil.

Should the price for oil rise from $75/barrel to $115/barrel in twelve months, that would be a 50% increase in one year, which is one of the two conditions for recessions in the U.S. since domestic oil production peaked in 1971; the other is the U.S. spending more than 4% of its GDP on oil.  Thank James Hamilton of the University of California, San Diego, for figuring those two out.  There may be a financial panic, but that alone won't cause the next round of contraction.  Sucking the money out of consumers' wallets and into their gas tanks will.

That's the pattern that Richard Heinberg of the Post Carbon Institute described in "The End of Suburbia," which I showed to my students last week, of high prices causing a series of longer and deeper recessions, and that's what I expect will happen next.  At that point, if some semblance of business as usual persists, the price will crash and then rise again, prompting the next set of suckers to get the capital to drill for tight oil, the supply will go up, and the price will fall again.  Lather, rinse, repeat.  Of course, if the capital dries up and stays that way, the oil stays in the ground.

Now that the price is at $66, the price only has to rise to $100 in a twelve-month period for that mechanism to work.  That's not an unreasonable increase in prices.  I'll be keeping my eye open for that.  I'll also mention it to my students this week, as the relationship between energy prices and the economy is on the final exam.

I did mention it to my students, along with a graph that I no longer can seem to find using Google Images.  Darn.  Too bad, as it shows that one of the two triggers for post-1971 U.S. recessions is an increase in the twelve-month moving average price of crude oil of more than 50% in one year.  At this rate, a simple rise from $55 to $85 in the next twelve months would not do it.  However, a jump to $100 by 2016 certainly would.

The other trigger would be the U.S. devoting more than 4% of its GDP to oil.  That graph survives.


We nearly went to recession again in 2010, but manage to avoid it.  I don't expect that will happen next time unless the 50% price rise happens, the U.S. goes into recession, and the price keeps rising while GDP falls.  That would result in a major recession.  Instead, I think that the U.S. is experiencing a repeat of 1998, when the rest of the world went into recession while the U.S. entered a heated expansion that ended when the price of oil rose more than 50%, resulting in a mild recession that was ended when the people heard (but President Bush didn't actually say) "go shopping or the terrorists win."  By that analogy, expect a recession in late 2016 and early 2017.  As for whether or not consumer spending will pull us out this next time, it might, but that depends on the consumer not having maxed out credit cards or the federal government providing a stimulus.  One or the other might be in doubt.