OPEC’s threatened 2 million barrel/day output cut has done nothing to halt oil’s collapse. The AP reports that Wednesday’s futures market dipped below $40/barrel for the first time since 2004. Markets are spooked by the realization that even mighty China is in a world of growth hurt at the same time as an unprecedented continued fall in US demand. US “demand for gasoline over the four weeks ended Dec. 12 was 2.7 percent lower than a year earlier.” “‘There’s just so much oil in inventory out there right now,’ said Michael Lynch, president of Strategic Energy & Economic Research. ‘Nobody wants to buy this stuff.'”
The demand collapse continues even though this year’s Dec. 8 retail price was $1.699/gallon, down 44% from last year’s $3.038. Watch out below, $1/gallon here we come since the wholesale gasoline futures market has January delivery gasoline at $1.0055. Retail prices slightly higher, your mileage may vary, see local dealer for details. Hmmm, it might be time for one last big road trip.
I won’t be happy until it goes down to .77 cents like it did in 98.
I really want to fill my Fit up from E for 6 bucks. Just cause.
I’m personally enjoying listening to Albertans who lorded their resource-rich economy over the rest of the country eat crow now.
Logically, I know this is isn’t a good thing, but I’m getting dirty, selfish gratification from it anyways.
Interesting.
Inflation adjusted we could see a historical high and historical low happen within 12 months of each other.
It should give the liquidation value of Chrysler inventory a bit of a bump.
This is bad news for everyone, since deflation can be nearly uncontrollable. As they said during the Depression “bread cost a nickel, if you had one”.
Deflation in prices brings with it deflation in wages. The crushed housing, fuel, auto, finance, and investment markets make for a perfect storm of Bad News, with little to no upward pressure on prices. This makes it extremely difficult to expect a positive return on any investment, since stock prices are tied to inflationary pricing in these markets. The cycle is worsened by reduced demand for these goods, since we know they will cost less later than they do today, and also because we have less money to spend due to lower wages or unemployment.
It’s a frightening downward spiral; beware of what you wish for.
I love it when the “experts” try to explain oil price movements in terms of economic fundamentals… as if oil was an operating business with estimable earnings and dividend yields.
Oil is liquified dead dinosaurs. As an investment it just sits around in a barrel, doing absolutely nothing for its owner until somebody else wants it, at which time a price is negotiated through market forces. And right now, the market is in the process of unwinding a huge speculative price bubble.
These things take time. Nobody knows exactly where prices will bottom, but one thing is certain: It will be years, or possibly decades, before we ever see $140 oil again.
gslippy:
you know what can also be uncontrollable? inflation. (see Germany 1923, Zimbabwe right now)
deflation helps those that saved.
inflation helps those that are in debt.
which will the government choose?
you know what would be awesome? real money that can’t be created from thin air so that we don’t have to worry about evil overlords “choosing” which way to trash our money.
You just absolutely cannot run a country, or a world, like this. Call me a commie, but how on earth are businesses (like Detroit) or consumers supposed to figure out how to operate in a world where a fundamental commodity can flail out of control? So, from March to July we were supposed to believe oil went from $80 or whatever to $145 due to “unprecedented demand from developing countries” that we are supposed to believe took everyone by surprise and could not be predicted or forseen by any supposed experts?
And now it’s at $38 due to the entire world economy shutting down overnight? (Well, honestly, I don’t think anyone could have seen that last bit coming..)
Can we really trash automakers, who still have product development cycles measured in years, for not being able to respond to an oil market that is completely unhinged?
Who’s helping people who locked in home heating oil prices in July out of terror, and are now getting fleeced?
Screw the free market – Exxon makes billions and the little old lady down the street can’t buy food because she’s paying her oil company $5 for something that now costs $2. You can’t run a country like that.
Time for a floating petroleum tax to fix consumer prices… We need to end this circus once and for all.
I’m personally enjoying listening to Albertans who lorded their resource-rich economy over the rest of the country eat crow now.
Yes, well, they still have nice private liquor stores and you don’t. :)
2.7% actually isn’t that impressive compared to earlier in the year, if you look at just traffic volume trends.
It is somewhat inaccurate to say that oil prices are only negotiated at time of use. It also depends on expected future use and supply. Prices went up due to speculation, yes, but that speculation was based in large part on two ideas:
1) The supply of oil was going to decline and would not easily increase with new investment, and
2) The demand of oil would only increase, and that people (esp. in North America) would not easily drive less and use less oil in response to higher prices.
Both of these turned out to be less true than assumptions. People really did drive less in response to higher prices; the demand response was the most impressive since the last fuel crisis. In addition, a smaller but still real cause is that there have been new promising investments and a willingness to do so (which are now being cut back with the lower price.)
And expectations of higher prices keep people conserving now, and thus keep prices from rising higher right now. People had very different ideas about how much higher prices would cause conservation.
A lot of Arab, Iranian, Russian and Venezualan despots aren’t going to be interested in holding the lid on production for very long. They’ve got elaborate patronage and welfare states to support, and those and their armies are the only things standing between them and a pissed-off populace. Look for oil prices to continue to drop.
I made 200% shorting oil prices over the last 5 months. I bailed out 3 days ago. Shoulda stayed in and made another 10% if I were to sell today. Oh well.
I also laugh how everyone becomes a big expert overnight. Just in June we were hearing analysts saying $200/bbl was right around the corner and we could possibly see it by the end of 2008.
The more I listen to “analysts” the more I realize nobody really has any clue.
Adjusted for inflation, what would a gallon of gas have to get to to be the cheapest ever.
don1967
Do you have any idea how many people said that about $40 just 4 months ago?
Can we really trash automakers, who still have product development cycles measured in years, for not being able to respond to an oil market that is completely unhinged?
We can and we should. They completely deserve the criticism.
Detroit had no business being in a position to pretend that they could forecast oil prices. Instead, they should have good vehicles in every class, so that they always have something to sell, no matter what the price of oil may be.
Having only one class of competitive vehicle is like betting everything on a single number at the roulette table. A strategy predicated upon perfect conditions is not a strategy.
Jerome10 said: Adjusted for inflation, what would a gallon of gas have to get to to be the cheapest ever.
I don’t know about inflation adjusted but I remember paying 25 cents a gallon at times in the late 60’s/early 70s.
Having only one class of competitive vehicle is like betting everything on a single number at the roulette table. A strategy predicated upon perfect conditions is not a strategy.
Ironically Toyota does a better job of having “A car for every purpose” with two brands than GM does with their bloated brand structure.
V8 10mpg 3 row SUV, Check
Hybrid 40mpg commuter, Check
Competitive products for ever marker segment in between the two extremes Check
Oil dropping is not deflation; its the market responding to a drop in demand that isn’t being matched by a drop in supply. That’s normal and healthy. As for the rest of it… well, I’m not an economist.
RedStapler
I find it funny that with all their involvement in motorsports, including a massive F1 budget that produces on mediocre results, Toyota doesn’t make anything that could be considered a sports car anymore.
Not that’s its a big segment, just sayin’
Yes, well, they still have nice private liquor stores and you don’t. :)
So does Quebec, and Montreal is still infinitely cooler than Edmonton, even if it’s an economic wasteland. :P
You just absolutely cannot run a country, or a world, like this. Call me a commie
You’re a commie. There.
There’s some value to the idea that perhaps a partial command economy might not be such a bad thing. That said, I actually am a commie and even I don’t think think that oil prices should be subject to pricing regulation. I do think there’s some room for a floating fuel tax to encourage sustainable energy policy (green home grants, tax credits on low-consumption vehicles, R&D) but flat-out fixing prices is asking for real trouble.
I’m going on a road trip to Baja next week.
1600 miles south, then 1600 miles north again.
As if going from San Fran to NY.
The kicker: it’s in a Prius and will use only 70 gallons for the whole trip.
Damn! How can I ever help OPEC get rid of their barrels?
Puh-lease, a decline in the price of oil is NOT deflation. When economists discuss the threat of deflation they are not talking about oil prices, the decline of which is an unqualified good thing, as that frees up peoples’ money to satisfy other needs.
General deflation in the wider economy is caused by one thing only: falling aggregate demand. Cheaper oil does not cause falling demand for everything else; far from it, it can only do just the opposite.
psarhjinian :
That said, I actually am a commie and even I don’t think think that oil prices should be subject to pricing regulation. I do think there’s some room for a floating fuel tax to encourage sustainable energy policy (green home grants, tax credits on low-consumption vehicles, R&D) but flat-out fixing prices is asking for real trouble.
I’m as non-commie as they come, but there’s a Price Stability argument to be made for a variable imported tariff (that gradually fades to zero as prices rise) to encourage domestic production.
When economists discuss the threat of deflation they are not talking about oil prices
Not quite true. It would depend upon who is discussing it.
Many would argue that it is the declining economy that has led to the collapse in prices. Those who believe that oil prices are an accurate reflection of the recession would think that falling prices are, in fact, deflationary.
Those who think that all of the last price increases were symptomatic of a bubble would believe that prices are just correcting to an appropriate level, and aren’t therefore deflationary.
Am I the only one who associates the decline in oil prices with the collapse of the banks and easy money?
Here’s my theory – When it was easy to get money people were buying up oil futures and holding them, knowing that if they waited the price would go up, and that the longer they waited, the higher the profit. This speculation drove the prices up to insane levels. However, when the banks got in trouble many investors had to liquify assets and had to start selling the oil. Prices started to drop.
Once the price started to drop, they all hurried to get out before they lost too much money… and they’re still motivated since the longer they wait to sell, the more they lose.
I believe this to be the case because the demand for oil -for commercial and consumer use just could not have fallen off by 2/3 in the short amount of time it took to go from $150 to $50 a barrel.
OPEC and the other oil countries were too greedy, and did not increase production, which allowed the price to go too high. Now it’s unrealistically low and won’t increase until this bubble of speculators getting out of the market passes.
The drop in consumer prices is long overdue. For the last 10+ years we would get a 3-5% raise in wages while the cost of everything from oil to toothpaste to housing went up by double digit percentiles. It’s time to have a re-adjustment of prices to better reflect wages.
It’s going to take some intestinal fortitude to push ahead with renewables in this oil-price climate, which will be tragic in a decades time.
It also seems to have got people out buying trucks again which is equally depressing. At least those are credit approved this time.
Can’t anyone in the USA think further than next quarter?
Damn those evil Big Oil companies, now they’re manipulating prices so they can lose money on what’s in inventory!
I’m as non-commie as they come, but there’s a Price Stability argument to be made for a variable imported tariff (that gradually fades to zero as prices rise) to encourage domestic production.
Heh.
Welcome to bizzaro-world, where the socialist is arguing for deregulated pricing and the free-marketeer is supports government-backed price controls.
What I want to know is what happened to those folks who confidently boasted that oil would NEVER EVER EVER go under $100/bbl EVER again?