Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
Israel’s 50-Year Time Bomb, Pushing Palestinians to the Edge - 19th Oct 18
Bitcoin Trend Analysis 2018 - 19th Oct 18
History's Worst Stock Market Crash and the Greatest Investing Lesson! - 19th Oct 18
More Signs of a Stocks Bull Market Top and Start of a Bear Market in 2019 - 19th Oct 18
Stock Market Detailed Map Of Expected Price Movement Before The Breakout - 18th Oct 18
Determining the Outlook for Gold Mining Stock - 18th Oct 18
Investor Alert: Is the Trump Agenda in Peril? - 18th Oct 18
Stock Market is Making a Sharp Rally After a Sharp Drop. What’s Next? - 18th Oct 18
Global Warming (Assuming You Believe In It) Does Not Affect Gold - 18th Oct 18
Best Waterproof Compact Camera Olympus Tough TG-5 Review - Unboxing - 18th Oct 18
Silver's Time Is Coming - 17th Oct 18
Stock Market Volatility Breeds Contempt - 17th Oct 18
Gold 7-Year Bear Market Phase Is Over - 17th Oct 18
Gold - A Golden Escape - 17th Oct 18
Tec Stocks Sector Set For A Rebound? - 16th Oct 18
Real Estate Transactions are Becoming Seamless with Blockchain-Powered Data Sets - 16th Oct 18
Important Elements of a Viral Landing Page - 16th Oct 18
Stephen Leeb Predicts 3-Digit Silver and 5 Digit Gold?! - 16th Oct 18
BREXIT, Italy’s Deficit, The EU Summit And Fomcs Minutes In Focus - 16th Oct 18
Is this the Start of a Bear Market for Stocks? - 16th Oct 18
Chinese Economic Prospects Amid US Trade Wars - 16th Oct 18
2019’s Hottest Commodity Is About To Explode - 15th Oct 18
Keep A Proper Perspective About Stock Market Recent Move - 15th Oct 18
Is the Stocks Bull Dead? - 15th Oct 18
Stock Market Bottoms are a Process - 15th Oct 18
Fed is Doing More Than Just Raising Rates - 14th Oct 18
Stock Markets Last Cheap Sector - Gold - 14th Oct 18
Next Points for Crude Oil Bears - 13th Oct 18
Stock Market Crash: Time to Buy Stocks? - 12th Oct 18
Sheffield Best Secondary School Clusters for 2018-19 Place Applications - 12th Oct 18
Trump’s Tariffs Echo US Trade Policy That Led to the Great Depression - 12th Oct 18
US Dollar Engulfing Bearish Pattern Warns Of Dollar Weakness - 12th Oct 18
Stock Market Storm Crash, Dow Plunges to Trend Forecast! - 12th Oct 18

Market Oracle FREE Newsletter

Trading Any Market

The Myth of Lower Oil Prices Will Hit Consumers

Commodities / Crude Oil Dec 04, 2014 - 02:07 PM GMT

By: Money_Morning

Commodities

Michael E. Lewitt writes: Media elites and Wall Street cheerleaders are greeting lower oil prices with open arms.

Investors should beware these self-appointed experts bearing gifts.

Oil prices are falling for reasons that should be surprising to nobody: supply has been rising and demand has been falling. If prolonged, which it is likely to be, the drop in oil prices is going to be destabilizing geopolitically and damaging economically.


For those who want to believe in a magical economic rebirth as the price of oil falls, well, good luck with that.

My view is distinctly different, and it demands we look at the whole economic picture as it is, not as others want it to be. It's time for some hard truths…

"Extra Money" in Our Pockets Is a Delusion

Global oil supply has been rising due to the explosion of fracking in the United States as well as rising output from Libya, Iraq, and Iran. Demand has been falling because the global economy is faltering.

With the exception of the United States and China, the rest of the world is in recession, and even Chinese growth is less than meets the eye and lower than in previous years. The simple fact is that demand for oil is weak at a time when supply has never been higher.

Furthermore, supply has been abetted by the availability of cheap capital to fund new projects in the shale regions not only in the United States but in other parts of the world as well. These conditions have led to a more than a 40% drop in prices since the summer that virtually nobody expected.

The argument that consumers will wake up and find extra money sitting in their checking accounts because gas is cheaper is an intellectual affectation of a media and Wall Street elite that is completely out of touch with reality.

It is an argument promulgated by those elites about the experience of the disenfranchised. The people who make these arguments are generally highly compensated media and financial industry types who are least affected by changes in the prices of everyday products and services.

Those realities include wage growth, which remains sluggish. There may be signs that wage pressures are building, but they have yet to arrive in a meaningful way. More important, the cost of every other product or service that people need to live – food, insurance, tuition, etc. – is much higher than it was five or ten years ago.

As The Wall Street Journal reported in a December 2 front page article "Basic Costs Squeeze Families": "The American middle class has absorbed a steep increase in the cost of health care and other necessities as incomes have stagnated over the past half-decade, a squeeze that has forced families to cut back spending on everything from clothing to restaurants."

Spending on healthcare, for example, has increased by 21% between 2007 and 2013 (and is no longer optional thanks to the Affordable Care Act).

Further, other expenses that have increased since 2007 include home Internet (+81.9%), cellular phones (+49.1%), rent (+26%), education (22.2%), and food at home (12.5%), none of which would be considered truly discretionary anymore.

Those fortunate enough to save money at the gas pump will have plenty of uses for that money; it won't be burning a hole in their pockets.

Furthermore, lower gas prices aren't creating money but merely shifting money from one category of spending to another. The idea that this will increase economic activity is nonsensical.

Here's Where the Logic Fails

The fallacy of consensus thinking on this point was fully evident in a recent speech by New York Fed President William Dudley (God forbid our central bankers shouldn't number themselves among the deluded!).

In a December 1 speech he said, "Since energy expenditures represent a higher proportion of outlays for lower income households, falling energy prices disproportionately raise their real incomes. Also, because such households are more liquidity constrained, with budgets that often bind paycheck to paycheck, they have a higher tendency to spend any additional real income. As a result, much of the boost to real household income from falling energy prices is likely to be spent, not saved."

This is not only incredibly condescending but logically nonsensical. Mr. Dudley is saying that money that would have been spent on gas will now be spent on other things, but that does not mean that more money is being spent; as noted above, all it means is that money is being shifted from one expenditure to another.

The former Goldman Sachs partner simply ignores the fact that the only thing lower oil prices will enable lower income people to do is spend their energy savings on other necessities that are increasing in cost like health insurance, rent, education, and the like.

It also ignores the negative effect that lower oil prices will have on the business sector…

The Economic Reality: Lower Oil Prices Hurt

Bridgewater Associates, LP, a highly respected hedge fund that writes some of the best research on Wall Street, confirmed that lower oil prices will have a negative impact on the economy.

After an initial transitory positive impact on GDP (buying into the argument that consumer spending will receive an initial boost – see above), Bridgewater argues that lower oil investment and production will lead to a drag on real growth of 0.5% of GDP.

The firm notes that over the past few years, oil production and investment have been adding about 0.5% of GDP to nominal GDP growth but that if oil levels out at $75 per barrel, this would shift to something like -0.7% over the next year, creating a material hit to income growth of %1 to 1.5%.

Perhaps it is the holiday spirit that is confusing allegedly intelligent people like central bankers and Wall Street strategists into thinking that lower gasoline prices will magically create more money that will somehow boost overall spending in the economy.

Whatever the reason for their thinking, however, it is just plain wrong. Lower oil prices are a reflection of a slowing global economy and will further contribute to slower growth over the course of 2015.

Beware the opinions of experts when it comes to economic matters, especially around the holidays.

Source : http://moneymorning.com/2014/12/04/the-economic-fallacy-of-lower-oil-prices-will-hit-consumers-right-here/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules