Demand Destruction Not In Time To Stop Economic Destruction
Just a few months ago there were wide proclamations of fundamental support for oil prices approaching $200 or $300 a barrel by next year. It is probably somewhat ironic that one of the most frequent predictors of these oil prices was none other than Morgan Stanley, the same Morgan Stanley now reportedly in dire financial straits. As oil prices soared the monetary policies of nations were governed by the fear of inflation as the core price indexes soared on the back of big oil hikes. Unfortunately for everyone in the free world the inability or unwillingness of Treasuries world wide to loosen monetary policy through lower rates has resulted in a once in a lifetime global collapse.
With oil prices now dropping and global demand destruction in full swing we are seeing a precipitous decline in gas prices. Over the last two weeks a record drop has occurred with gas prices sliding down almost 20 percent. It is interesting to note that the gap between oil prices and gas prices still yields higher gas prices than would be historically supported at this price per barrel. Gas Buddy maintains a wonderful gas price survey graph that dates back years. Domestic demand dropped close to 4 percent in the most recently reported period but that seriously lags current market conditions. Probably the best indicator of the recent demand destruction is the weekly oil inventory report. This past week the experts expected very small increases in reserves. We were instead greeted by actual increases that were seven or eight times higher than the consensus. This all provides support to the idea that economic activity diminished by a magnitude commensurate with a serious recession at the end of September. Most experts seem to correlate the staggering decrease with the bailout crisis. Off the record reports from retailers reportedly show a massive drop in retail activity starting at the end of the month as consumers in shock over the financial crisis started hoarding their chestnuts. Car dealers have also reported foot traffic into dealerships fell by 50 percent or more and overall automobile sales plummeted 20-40 percent among the major manufacturers and not even Honda was immune this time.
One TV analyst likened the current price drop as a tax cut. That would be justifiable logic if consumers were accustomed to paying $4 a gallon over the last decade. Prices dropping back to the top edge of the price curve of the last ten years isn't a tax rebate it's pretty much no different than a tax and likewise had the same effect on the economy. Economic activity is going to be sharply negative in this quarter, perhaps as much as 4 percent lower when all is said and done in future revisions. How far into 2009 the recession continues will be dictated by what happens over the next week or two in the equity markets. Despite the proclamations of many pundits saying we have hit the bottom we clearly have not. As CNBCs Jim Cramer has discussed this recent crash is much different than previous historic crashes. This occured in what was still a growing economy. We are just now hitting the economic contraction after enduring several years of falling home prices and months of job losses. There is a lot of bad economic news to come and it is hard to fathom the market rebounding much on the back of terrible holiday season sales.
All industries in this country were hurt by the rampant speculation and inability of our government to reign in the invisible if not naked speculation that allowed for market manipulation. The airline industries were hurt so bad they had to raise prices, cut routes, cut staff and many of these airlines will never regain their financial strength. GM and Ford are subject to continual rumors of bankruptcy and mergers as well as Chrysler. Shipping giants are struggling as are major technology providers to the corporate sector. It's just starting to get bad now and all of these things have already taken place. The damage has been done and gas at $1.50 a gallon in a few months won't do anything to repair the irrepairable damage done to our economy by a few dozen organizations that manipulated prices and markets.
The next few years will be tough for this country. So much damage has been done and much of the blame is being shifted to the subprime crisis with no basic understanding that oil prices started the ball rolling this year to the overall slowdown that put us into crisis mode. Where are all the experts now arguing fundamentals should yield $200 a barrel oil?