Today’s USA Today includes a Q and A about falling oil prices:
A: Oil prices are collapsing. Consumers are pouring less of their money into their gas tanks. That should be good for the economy and stocks, right?
Not exactly. The stock market is struggling this month as the decline in oil prices intensifies. There are several reasons for this. First is the direct hit. Lower gasoline prices result in lower prices of shares of energy stocks, which are a big contributor to the markets. Exxon Mobil (XOM) is the fourth most valuable company in the Standard & Poor’s 500 so when its shares tumble, that hurts the broad market. Shares of Exxon are down more than 12% this year, creating a big downward draft for the other companies to overcome.
The “answer,” provided by Matt Krantz tells us a few things about where oil is being positioned as a “driver” of the current economic expansion.
1. First of wall, the article reminds us of the uselessness of referring to “the economy” as one unified thing. Of course falling oil prices are good for some people, while they may be bad for others. People who use oil, and industries that are energy intensive, will of benefit from a fall in the oil price. Those who are heavily invested in oil (such as hedge funds, oil companies and others), on the other hand, will benefit from high prices. To refer simply to “the economy” tells us nothing at all about how oil prices really affect human beings in the real world. Frank Shostak explains here how “the economy” is just a metaphor.
2. Oil is becoming something of a bubble industry and is being positioned in a way similar to where housing was prior to 2008. If we insert “housing” and housing related-industries in the USA Today piece where “oil” and oil-related industries now are, we find some striking similarities with what was being said about housing prior to 2008. We were told repeatedly how high housing prices were the key to keeping the economy chugging along. Certainly, this was true for many industries that were heavily invested in housing, but common sense tells us that falling housing prices are and were a good thing for people who actually use housing, especially low-income consumers of housing. Falling prices, as Jim Grant recently noted, constitute progress, not grave economic threats. But, when your focus is primarily on what prices do to hedge fund managers, Wall Street, and other chosen favorites of the central bank, (as is the case with most national business reporters like Krantz), of course high prices are a good thing, and a fall in prices is a reason for worry.
3. Some still confuse correlation and causation. Implied in all the explanations of how a falling oil price is bad is the suggestion that a significant fall in prices could lead to a recession. Indeed, Mark Thornton recently discussed the correlation between falling oil prices and recessions. But of course Thornton did not suggest that the falling prices cause the recessions. In contrast, the peaking oil prices the precede a recession are indicators of a Fed-induced boom that precedes a bust. and in this case, there may even be more emphasis than usual on propping up prices, since oil is one of the few well-performing industries right now, producing a large portion of what little job growth there is nationwide, and a sizable share of GDP growth. The fact that there is such an emphasis now on boosting for high oil prices and claiming they are key to economic progress, we can possibly guess where the next round of bailouts for too-big-to-fail enterprises will be directed.
