After skyrocketing to a high of $147, then crashing to $30, crude oil has rebounded to nearly $60 a barrel. (Some good analysis of the oil market can be found at wtrg.com)
Will this cause the economic "green shoots" to wither?
Nah. Unfortunately, there are no green shoots. And the oil rebound is a technical matter, caused by the rising stock market. This market rally is causing "mini-rallies" in other assets; this is because at the end of the great market boom of 1980 to 2007, every asset in the world had become severely overvalued, from stocks, to real estate, to commodities, to art; you name it, it was overvalued. An ocean of fiat money was pushing up prices in everything that could possibly be an investment good. The bear market in stocks has also been a bear market in all of these alternate investment assets, including the king of bear market commodities: gold. (Let me hasten to say that the fall in gold prices is a temporary phenomenon, a secular bear market within a bull market that began in 2002.)
Oil presents us with a paradox. Are prices rising because demand is stronger than we thought? That would be a good thing. Or will the rising demand quash consumer spending? I'd say neither. Look for oil prices to continue upward as the stock market rally continues, but I expect oil to correct down sharply as the rally ends. Of course, the long term trend of oil is up, both because of inflation and because of the geological reality of peak oil.
2 comments:
Pretty interesting blog. So what happens if the demand for oil suddenly drops due to innovations in alternative fuels? Say for example, someone finally discovers a way to cheaply and efficiently run a car on prduct X (non oil based, yet can be used in regular gasoline engines). This will cause a major change in the financial market yes? Is this a change that is big enough to warrant fear?
Yes, a technological change like this would cause a drop in oil prices. Indeed, I hope this does happen. Oil should really only be used as a lubricant and perhaps for its unique hydrocarbon chains, which give it unusual chemical properties.
I don't think the new technology will run in gasoline engines, though. I think there will be something new that will make the internal combustion engine obsolete.
I don't think we should be afraid of such a development. New technology is good in general, though I admit it's not always used wisely, and often causes other changes that can result in dislocations.
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