Why Should a Decline in Oil Prices be Bad?
The dramatic fall in the global price of oil is being cited by the financial press, government officials, and academia as the catalyst for the recent abysmal U.S. economic data which shows that the economy is, in all likelihood, sliding into a recession or worse.
Oil prices in dire straits…
While falling oil prices sound like a plausible explanation for the abysmal financial numbers, anyone with a modicum of economic sense (which excludes much of the financial Establishment) can see that it is merely a smokescreen to obfuscate the real culprit.
The fall in oil prices, while detrimental to many oil producers, should actually be a boon for the rest of the economy, especially those industries that are heavily reliant on energy. Lower fuel prices mean lower production costs leading to, ceteris paribus, greater output.
The price of gasoline has declined precipitously – click to enlarge.
For consumers, lower oil prices mean lower utility bills and cheaper gasoline, both of which mean more disposable income for either savings or more consumption. Why would greater disposable income lead to a recession?
Naturally, lower prices are not good for oil producers. But a decline in one sector of the economy (albeit an important one), does not lead to a general collapse. While the energy sector may be contracting, industries that use fuel should be able to expand as their production costs fall.
What constitutes great news in oil exploration nowadays
The Pseudo-Prosperity of the Printing Press
The Federal Reserve’s Quantitive Easing (QE), Zero Interest Rate Policy (ZIRP), Operation Twist (OT), and their variations have created a massive bubble in asset prices which is now beginning to burst. All of these polices have been undertaken to save the banking system from collapse after the crisis of 2008. Since the start of the Great Recession, none of the problems that have led to it have been addressed.
Not only has the stock market been artificially inflated by the Federal Reserve, but it has come at a devastating cost in the decimation of savers, as the return on their money has dropped to next to nothing. This, of course, has had debilitating consequences on retirees and seniors.
Broad US money supply TMS-2 and the Federal Funds rate – click to enlarge.
The Obama Administration, with little opposition from Republicans, has increased the federal deficit to nearly $20 trillion from the $9 trillion it had inherited with little or no hope of any reduction. Its wasteful stimulus program of a few years ago has done nothing to improve conditions while its collectivist health care initiative has placed crushing burdens across the economic spectrum.
What is even scarier is that Obama is apparently clueless about current economic conditions, as he mindlessly demonstrated in his (thankfully) last State of the Union Address:
“Anyone claiming that America’s economy is in decline is peddling fiction. What is true – and the reason that a lot of Americans feel anxious – is that the economy has been changing in profound ways, changes that started long before the Great Recession hit and hasn’t let up.”
Obama is correct in one sense: there is a “profound change” that is happening in the economy, however, it is a change for the worse which he and his harmful policies have created.
Federal debt since the 1990s – Obama took office in January 2009 – click to enlarge.
Not surprisingly, in their rebuttal to the speech, the Republicans offered little in substance. Instead, they chose a spokesperson whose only claim to fame was her infamous decision as governess of South Carolina to remove the Confederate flag from state buildings. Needless to say, the choice of Nikki Haley met with disgust among the party’s base. The GOP is not called the “stupid party” for nothing!
Unfortunately, for the vast majority of Americans, there is little likelihood that the present Administration or the next, be it of a different party, will turn things around. Instead, there will probably be more of the same.
Until there is a change in ideology where the corrupt notions of money and credit creation via the printing press and the running of gargantuan deficits are debunked, American living standards will never improve.