Yahoo’s finance headlines always provide a good look at the panic of the last few weeks. Virtually buried in the “Oil at 3-year lows; gas below $2 in 23 states” was this hardly startling revelation:
Also Goldman Sachs, which earlier this year predicted oil would reach $200 a barrel, said Wednesday that it was discontinuing its oil trading recommendations. Goldman said Wednesday in its weekly energy report said while continued weak demand and constrained credit would keep prices under pressure, it hoped that high volatility would provide a better exit point for trading.
“The volatility in the past few weeks has mostly been to the downside and the pressure on the oil complex has increased,” the report said. “In the near term, we do not expect significant upside potential and as a consequence we are closing all of our oil trading recommendations.”
Of course, the surprise isn’t always to the downside:
Light, sweet crude for December delivery fell 7 percent, or $4, to settle at $49.62 in Nymex trading.
Oil prices have fallen 66 percent since reaching a record $147.27 a barrel in mid-July.
Oil analyst Stephen Schork wondered if $50 would even hold.
“Maybe $50 is too conservative given the putrid, putrid look at the economy,” he said.
“If we’re not out of these doldrums nine months from now we’re looking at $30 oil.”
Did I say that deflation sucks for pretty much everyone? If you owe money, it becomes more ominous. If you own something, it falls in value. If you derive everything from income, you’re likely to lose your job.
Here’s to hoping I don’t lose my job. On the cheerful side, this last weekend, we went out of state… at one point paying $1.87 for a gallon of unleaded. Seems downright cheap now.
The upside of real deflation (as opposed to asset devaluation when a speculative value bubble corrects itself) is that transitive consumable resources which are only dependent on resource and production costs become cheaper. That is, things like food, clothing, entertainment, luxury items, etc. For the essential commodity items, a decrease in price should be a good thing, provided people have adequate savings and gainful employment in solid industries not based on deficit consumption of expendable luxury items (eg: food or clothing production). Heck, even people building houses can still do so profitably for a little while still, unless they were over-extended during the obvious bubble; housing prices are still above construction costs in most areas.
Don’t worry, the current situation is only temporary. Once the asset valuations contract to reasonable levels, the perceived “deflation” will go away (the time for this is variable, depending on the level of market interference). When the government is borrowing and spending unprecedented amounts of newly created money, the value of that money will inevitably go down, and we’ll have large-scale inflation again. It won’t help you get a job or fix our industrial base, of course, but at least stuff will start rapidly increasing in dollar-denominated “value” again.