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Silver Lining in Economic Collapse: Cheap Gas

It’s only about half over, but 2012 is already looking like a very bad year for the world economy. The measured optimism that many had going into the year has completely faded. The good signs at the end of last year turned out to be a short uptick rather than the beginning of a long-term trend. Once again, smart observers are beginning to debate whether a double-dip recession is on the horizon. The current state of Europe and China does not inspire confidence that it will be avoided.

Yet amidst all this bad news is a silver lining, and it’s a big one. The Financial Times reports that a number of large energy companies and investors are preparing for serious downward pressure on oil and gas prices. The poor economic situation that is poised to rock the world economy may be even worse for oil producers:

Oil consumers fear the current slide in prices – largely due to slower economic growth in China, the main engine of oil demand, and the eurozone sovereign debt crisis – is only the beginning of a major sell-off. Saudi Arabia has this year boosted production to a 30-year high, further subduing prices.

As always, however, bad news for oil producers is good news for consumers—the recent spike in energy prices is likely to drop considerably. Although the prices are unlikely to fall all the way to their late 2008 lows, it still means cheaper gas, cheaper heat, and reduced manufacturing costs. For the millions of families struggling with unemployment and falling wages, these small changes could make a very big difference.

Geopolitically, cheap oil is also a good thing. President Putin is going to have a harder time taking advantage of Europe’s woes. It will be easier to maintain support for the oil embargo against Iran. Hugo Chavez has less spare change to scatter around the region.

Enjoy it while it lasts.

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  • St. Bruno

    If Obama gets re-elected, we’ll have cheap gas for quite a while.

  • Jacksonian Libertarian

    As energy prices recede the deflation in the economy caused by deficit spending will become more apparent. All those saying we are going to have massive inflation will be revealed as fools suffering from Post Traumatic Inflation Syndrome (PTIS) brought about by the double digit inflation of the 70’s and 80’s.

    Real Inflation is caused by excessive growth in the Money Supply, not by energy supply problems caused by Environmentalist blocked energy development.

    I would rather have 10% inflation than 1% deflation, inflation is a pain, but deflation is destructive characterized by bankruptcies, unemployment, and foreclosures.

    Historians will recognize our present era as Great Depression 2.0, caused by the Government draining of the Capital markets just like Great Depression 1.0 was.

    “There is a reason why it’s called Capitalism; it’s because Capital is what Fuels it.” Jacksonian Libertarian

  • Jim.

    Goodbye to brown jobs, too?

    @Jacksonian Libertarian:

    Deflation is easy to avoid… just print money. Use that money to buy back government debt. Voila, simultaneous debt reduction and sound money management.

    I have to take exception to the idea that a spike in energy prices is somehow not “real” inflation. Expensive energy increases transaction costs across the board, meaning that marginally profitable companies go under, leading to bankruptcies, unemployment, and foreclosures. Money-supply inflation on the other hand (as long as it affects both wages and prices) is only painful for those who are facing price increases but not the salary increases, and those with existing savings (though it helps those with existing, fixed-rate debt.)

  • wanderer

    “Historians will recognize our present era as Great Depression 2.0, caused by the Government draining of the Capital markets…”

    Heh. With ten-year Treasuries paying 1.6%, with people *throwing* money at the federal government saying “Please borrow my money for a decade and pay me less than the inflation rate for the privilege!”, I don’t think government draining capital is the problem.

    And what was that you were saying about the purity of your precious bodily fluids?

  • Jim.


    Who’s throwing money at the federal government? Isn’t the Fed buying the majority of new bond issues?

    Besides, unless we’re paying off our debt at the end of those ten years — yes, running a budget surplus of a trillion dollars or more — that 1.6% is nothing more than a “teaser rate” on the biggest Adjustable Rate Mortgage in the history of mankind.

    It’s like some people have learned nothing from the last four years.

  • William Knabe

    Cheap oil and gas may be closer and more enduring than you think.

    Recent study from Harvard states there’s “a sort of Saudi Arabia within the United States” due to new technology.

  • wanderer

    @5 “Who’s throwing money at the federal government?”

    People seeking a safe haven for their assets as they deleverage, which they are doing.

    A depression is when households, businesses, and governments all try to delever at the same time. It kills the economy.

    Households are delevering. Businesses are delevering. Local and state governments are delevering. If the federal government does too, then the economy, now sputtering along at near-zero growth, will tank completely.

    @6 The trouble is, shale oil has a high cost of production, and is only profitable at around $100/barrel. Watch for new oil projects getting delayed or killed as the price of oil drops.

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