Oil Prices Slide On European Economic Fears
It is said that credit is the lubrication of any economy. I like that line, I’ve use that many times over the last two years. I like it I suppose because we although that oil is the stuff that lubricates almost everything. We understand that it makes everything slippery and reduces friction. We can understand the oil is needed almost everywhere were something moves. So when oil prices have a 19% lower correction since May 3 even low-rent economists like me take notice.
Oil prices hit an 18-month high on May 3rd settling out at 87.15 US a barrel. It settled Monday at $70.08 US a barrel after dipping below $70 for part of the day. It hasn’t been the biggest news, as a 19% rise in the price of oil tends to get people dander up a little bit quicker than the opposite decline. Sure there is a little bit too much oil on the market but this latest price decline has a lot more to do with the perceived economic meltdown in Europe.
Essentially what is happening is something we talked about last week. You all know the sovereign debt default problems that are arising in Europe specifically Greece. It has essentially put a chill in the European economy as countries like Greece, Spain, Portugal and Ireland; share the common currency the Euro. As the Euro has crashed and so has investor confidence in the European economy sending currency flows into the US dollar. Oil and other commodities are victims of this, as a lack of investor confidence will eventually end up in a lack of demand for these commodities. That has put oil where it is at $70, down $17 in two week’s time.
It certainly opens the specter of the double dip recession and gives pause when thinking about the fragility of this global economy. Here in North America I think everybody was thinking we were on her way back. Greece to us is this mythical place in South East Europe where civilization started. Many of us never considered that their bankrupt spending might cause us some economic angst in 2010.
In many ways the problems in Europe mirror the Lehman Brothers issues of 2008 but to some extent greater. When you have sovereign defaults that makes the economics that much jittery and the economic fallout that much greater. If you cannot depend on the government to pay it back, who can you, trust?
Of course lower oil prices are not all bad news. For instance, we all know that lower oil prices are an economic stimulus to our own spending. We are also at the beginning of the summer driving season, which generally stimulates gasoline demand. So maybe these lower oil prices will only be a short-term diversion. Needless to say the real problems lay in Europe because nobody knows when Europe’s economic problems will be put to rest.
I must admit I thought I had this thing figured out. When Lehman Brothers melted down and credit dried up around the world I thought we would be back with good economic numbers in 2010. That has happened but what I do not consider was some of the inept management of some European governments. I would include the American government in that comparison except for the fact that they have the world’s biggest economy and the world’s biggest guns. At the end of the day, when capital is looking for a home, that’s where it’ll go. The events of the last two weeks have been testament to that.
Where are oil prices going to go next? Much will depend on the reality of the European economic slowdown. If it is real and jobs are lost and economic activity slows down the price of oil will inevitably go down a bit farther. If it is a flash in the pan maybe it is only a short-term move down. There is still China and India putting new drivers in cars every day with an insatiable appetite for oil. So I don’t think we’ll see the oil market fall off completely no matter what happens. You can also bet that $100 oil will be back at some point in the near future.
In my business I am paying almost half for fuel that I paid two years ago. So that is an economic bonus to me as well as to everybody else reading this column. In Canada though it is always a double-edged sword. It’s that way because to a large extent the price of oil is an economic boon to the tax coffers of this country. Alberta and Saskatchewan turn into cash cows for the government when oil prices are high. At the end of the day that helps all Canadians.
So keep a watch on these oil prices over the next week to 10 days. They should give us some clues on global economic stability. Hopefully Europe will get it together. If they don’t, at least in the short-term, I’m sure oil prices will let us know.