Terry McCrann: Oil costs set to shake things up
Ask the average person whether the recent sharp and sudden drop in the world oil price is a good thing and you will almost certainly get an immediate and unqualified “yes”, writes Terry McCrann.
Terry McCrann
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Ask the average person whether the recent sharp and sudden drop in the world oil price is a good thing and you will almost certainly get an immediate and unqualified “yes”.
They only have to look at — or even just “feel” — how the cost of filling their tank has dropped from nearly $100, say, to maybe $80-85 to know that. Try telling them it’s “bad” for them.
Ask the “expert” — whether a specific oil or energy expert or a more general economist — and you will probably get an answer that starts with something like “on the one hand …”
Ask a so-called “climate scientist” … well, we just won’t go there.
CHEAPER FUEL PRICES EXPECTED IN COMING WEEKS
Well, I’m here to tell you two things.
First, that my “average person” is dead right. What’s good for Joe and Joanna Citizen individually is good for everyone and the overall economy.
Even if there are some specific negatives, like lower prices for exports of our coal and gas, those are far, far, outweighed by the benefits not just for us down here in Australia but for the entire world in lower oil and energy prices more broadly.
The equally important second thing turns on the way the drop — the sudden drop — was almost universally not predicted by the so-called experts.
Back in mid-2014 the world oil price was more than $US100 a barrel. Back then, the Aussie dollar was still riding high at about US94c, so that translated to just $106. At today’s US72.5c that would translate to $137 — and a lot more than $100 to fill your tank.
The oil price then embarked on a long slide to bottom out around $US25 a barrel in mid-2016. Why? One word: shale.
The US’s aggressive development of shale oil and gas completely changed the dynamics of the world oil market. President Obama, who did everything he could to try to stop it, in the cause of fake environmentalism, nevertheless was more than happy to claim the “credit” for the huge falls in gas prices — both the way the Americans use the word gas and the way we do.
Then the price turned around: from mid-2016 until about a month ago, the world oil price rose steadily but relentlessly to peak around $US75 a barrel. Because of the weaker Aussie dollar, that translated to the same $106 a barrel that the $US100 oil price had in 2014.
The experts — both sorts: energy and economic — were competing to predict how quickly it would get back to $US100 a barrel.
Whether because we had reached “peak shale” (just as we were supposed to have already reached peak conventional oil around now; yet another failed “expert prediction”).
Or because demand from a booming US (and Chinese) economy would grow faster than supply. Or because the Saudis — or the Russians — would play their own geo-economic games with supply.
Instead, suddenly the price has turned; dropping $US20 or nearly by one-third in just one month. Totally unpredictably, if you listen to, far less believe, the “experts”.
Let’s hope it keeps going down. If the fall is indeed being driven by a slowing global — and especially US and Chinese — economy, a lower oil price (and energy prices more generally) is exactly the best and quickest-working antidote to reversing that and getting the economy moving.
A lower price doesn’t only — quite literally — drive your dollar further, it feeds positively into everything across the economy.
Energy is the foundation of our prosperity and the cheaper it is the more prosperous we are. This also includes all the things we might not think of directly as “prosperity” — like education, public safety and healthcare.
The second big thing I want to tell you is that “this” — the lower oil price and its unpredictability — will be a critical element in what happens in 2019: to both the local and global economies and how both markets and policymakers respond.
Again, the experts “think” one-dimensionally: world economy slowing; oil price falls; US Fed holds off raising interest rates; so Wall St (and our market?) will both fall further and be good buying.
Unlike the experts, you should try to think dynamically. “Things” will, and indeed are, already reacting to the lower oil price.
As I argued earlier in the month, the Fed won’t blink because Wall St has a temper tantrum (it’s now just shy of 10 per cent off its recent all-time peak). Only a real collapse will prevent it raising its official interest rate again just before Christmas.
At the same time, our Reserve Bank won’t touch its rate at its last meeting for the year on Tuesday week.
Bottom line: 2019 is going to be volatile. But a lot of that volatility will be positively self-correcting.
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