Oil fell yet again yesterday, down to $127.75 on the New York Mercantile Exchange at the time of writing. It is now $17 lower than the price it reached on the 7th July. It seems unlikely oil has ever fallen so rapidly over such a short time frame.
The key question though is, are we seeing the bursting of the oil bubble or are we merely seeing normal market volatility? Consider this: oil may have fallen by $17, but in percentage terms it is down just by 12 per cent.
Evidence to support the argument that the price of oil has crashed comes in the shape of auto sales. According to yesterday’s Telegraph, European auto sales fell 7.9 per cent in the year to June, while US sales fell to their lowest level in 15 years. Chrysler saw year on year sales drop 36 per cent and, for the first time since England got knocked out of the World Cup by the Hand of God – Maradona, GM are not paying a dividend.
But, perhaps even more tellingly, in China, despite a 3 per cent fall in average car prices, the stock of unsold cars rose by 50 per cent on this time last year. It appears, even Chinese consumers, despite heavy gas subsidies, are feeling the oil pinch.
But, on the other hand, yesterday, billionaire oil investor T. Boone Pickens told the US Senate Homeland Security and Governmental Affairs Committee: “oil will hit $300 a barrel in 10 years,” unless the US reduced its dependence on overseas oil.
The falling pound and dollar are not helping, either. Every time the US and UK currencies fall relative to a basket of currencies, oil tends to rise in dollar terms and we feel the pain on both sides of the pond.
It has been argued here that oil at $130 is too expensive, far too expensive. Not only will oil at this price hurt the world’s great importers, that’s economies such as the US and UK, which in turn will impact on global trade, it will also hit the cost of trade. Goods that are sold overseas have to be transported.
These days trade is a complex web. Some countries make components, others assemble, the consumer products we enjoy in the West, imported from China, were not just made in China. A number of factories in different locations will have contributed. As oil moves up in price the cost of this practice will be hit hard.
Up to now there has been no sign of a major slowdown in world trade. In fact, recently the IMF upped its projections for economic growth for most major economies.
In the early 1970s, and then again 1980s, the world economy was brought to its knees before oil started to fall. The economic cycle surely hinges on boom and bust type patterns. Prices don’t tend downwards unless things are really dire. It took a combination of overpriced properties and a shortage of credit to bring the property market to its knees. House prices were overpriced for years, too.
This time around, oil is actually less important than before. In the West, oil makes up a lower percentage of our spending. Yet, while things are tough they are not desperate.
And that brings us to the big surprise in the current falls in the price of oil. Maybe it has come too soon.
If oil has peaked already, and we are seeing the correction, then this has been one of the shortest lived bubbles on record.
Never underestimate the power of consumers. We’ve had enough and we’re not going to take it anymore.We’ll cut our trips, we’ll buy local, we’ll insulate, we’ll get healthy, we’ll do what it takes.
And we’ll find that these changes are all better for our lifestyle anyway. I’m certainly finding that I like the new way of life a lot better. You won’t be getting me back as a rabid consumer.
Carole
a.k.a. ‘Mother’report this comment