November 28, 2014

Oil Wars

I’ve been asked a few times in the past week what my thoughts were regarding whether the recent declines in the price of oil that has been occurring is a sign of the slowing global economy. Since I am an investor in companies that are delivering on global energy needs, I am also a consumer and know well the effects of higher or lower gas prices on my own, if not the larger economic landscape. So here’s some of my thoughts.

First of all one doesn’t have to look far to see the evidence of manipulation of world crude prices. In part the bellwether Chicago Futures contract is open to speculators and energy producers alike and during the crisis when oil moved above $140 a barrel, investigations found lapses in the CFTC procedures, responsible for regulating trading conduct on the futures exchanges* Current accusations of financial firms causing disruption in the prices of commodities in general and years of governments and billionaires manipulating the value of currencies under the auspices of economically necessary or just for personal gain respectively has solidified the romanticism of “cornering the market” for gain. I think that is what’s happening now and the weakness in world economies, particularly large energy consumers such as China, the massive production of domestic energy product in the US, and the recent move by OPEC*, led by Saudi Araba, to publically refrain from cutting output and instead letting it gush all contribute to lower prices. Hence, the decline in oil has conspirators, and for now there is no end in sight.

Second of all, why are folks so upset about lower energy prices? Consumer confidence is the strongest it’s been since 2007* and recent US GDP figures show 3rd quarter growth at 3.9%. Unemployment has been in the Fed target range and declines in gasoline ensure that there is more money in the consumer pocket. All this while the oil prices are declining. Notwithstanding the customary triggers of Middle East military activity, or government sanctions, both expected to push crude prices higher instead have been ineffective in stopping its fall. I believe that it’s too early to suggest any meaningful impact on US growth and Euro and Euro Pacific growth really has nowhere to go but up. Inflation as well should be a concern with energy prices declining as the US Dollar moves higher (oil is priced globally in dollars) except for the fact that in the past five year as the dollar has declined against nearly all currencies oil prices have remained near $100. So far in my view the US economy at worst is stable.

I’ve never believed it a coincidence that the modern energy alternative movement was energized in the seventies during the OPEC induced gas crisis. At that time the assumption was OPEC wanted a hyper dependent population feeding the industrial wallet. And as the case (and debate) for energy independence or energy alternatives has grown in epic politicized fashion there is a silver lining to suggest that OPEC might be reaching a level of desperation that still needs to play out. With Russia and Brazil competing for leadership and no good coming from dependence in general or from the US independence specifically I believe we may be seeing the beginning of the end for industrial fuel dependence, although it still looks to resolve itself in the distant future. In the meantime oil prices can go lower and with change in export laws and world trading initiatives it could also start to move higher, I just don’t see the economic need as one that is growing at historic pace in an increasingly innovative world.