Monday, December 15, 2014

The Last Time Oil Crashed

The last time oil prices dropped this fast was in 2008.  Remember 2008?  We have not recovered from it, if we ever will.

I posted this article in Market Talk and got some great feedback on the article.  We are all enjoying cheaper fuel at the pump right now as that frees up money for other purchases.  When gasoline drops in half in a short period, that event is going to affect a lot of other things, too.  It could also be a sign of some very bad things to happen.

"There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months.  The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months.

Well, now it is happening again, but this time the stakes are even higher.  When the price of oil falls dramatically, that is a sign that economic activity is slowing down.  It can also have a tremendously destabilizing affect on financial markets.  As you will read about below, energy companies now account for approximately 20 percent of the junk bond market.

And a junk bond implosion is usually a signal that a major stock market crash is on the way.  So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds.  If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street."

E-85 is $1.79 in Blanchester.  That's about as low as its ever been.  My picture shows what it was not too long ago!

The discussion on market talk is very interesting.  I have a lot of farmer friends who post there I trust.  They all have some interesting points.

The point is we are all enjoying this reprieve in fuel prices.  What are the consequences?  In our tightly connected world market, when one thing goes down, so do other things.  Those things may impact our income and even our retirement.

It all looks scary to me.

Ed

7 comments:

  1. The fall in 2008 was orchestrated to get Obama elected. I guess this is the "other shoe" dropping.

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  2. The OPEC's influence on oil prices is decreasing, and before any U.S. company goes bankrupt because of low prices, you'll have the whole Russia (which is not even mentioned once in the article) which would go bankrupt first, so I don't think prices will get much lower.

    But the author probably made big money buying or selling bonds or stocks after publishing such a dramatized story...

    Another problem with these low prices is that it may slow down initiatives on renewable energy, although solar is now getting down to natural gas and coal parity, and has already beaten oil, or may have been responsible for the half-failed Lima summit, as low oil prices do not entice countries into reducing their oil consumption and their competitiveness.

    On the whole, it's probably a boon for the economy if not the environment, it's partially responsible for cutting the unemployment rate in half since Obama came into power.

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  3. Unfortunately farming and the trucks that transport our products burn diesel. Cheap gas will help save money driving to the coffee shop but won't have much effect on our costs otherwise. Fertilizer just went up in price?????

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    1. All my vehicles but one run on diesel, including my primary car. Diesel prices have also decreased.

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    2. Diesel is in lless deman than gas and the price of diesel usually follows gas prices, but there is some lag time. The diesel used on farms should be exempt from the highway taxes and diesel vehicles used on the roads usually get better mileage than their gas counterparts.
      We can compare historical trends and history often does repeat itself, but in the complex world of oil and in a world much more connected and interwoven everyday, new variables can make comparisons tricky.

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  4. I don't buy it. Oil prices are down because there is a glut and that is because of nothing more than increased US production. If Texas were a country, today it would be the 6th largest national exporter of oil. The US now produces more oil than Saudi-Arabia. OPEC is falling apart because they thought they had us by the balls and now the picture has changed. We simply no longer need them because we have increased our own production (on private held lands) despite the idiocy of the EPA and the current administration, and we have actually reduced national consumption. We are actually exporting oil and gas to Europe. And old Putin is in a tizz rattling his sword because the ruble has dropped in value by 60%. The Saudis did not agree to reduce production at the last meeting and told other OPEC members especially Venezuela and Iran to go pound sand. When oil prices go down its a net benefit to all of us, domestically and internationally. Because the cost of everything goes down and, domestic markets spool up because folks can afford to buy more stuff as prices are lower, and US industry becomes more competitive internationally as well so we produce more stuff which makes more jobs and more people have money to spend.

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    1. Gas here is around the 90 cent a litre mark. Diesel more like 1.20 per litre. I think the cheap fuel might be short term gain for long term pain. How long can the companies produce oil for less than the cost of production? We are seeing job losses here already in the oil industry.

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