Oil Prices Down. Why So Serious
Published : 29 January 2016 Author : Harry Notaras
Amid the collapse in oil prices there has been an outpouring of heartache and misery in the financial markets. Sentiment has pushed aside fundamentals as the death throes of a world with energy constraints is replaced with one of abundance. The age of renewable energy is fast approaching as a result of technological progress in its production and storage. At the same time the level of non-renewables has increased as a result of a different but just as profound disruptive technological progress by way of fracking. It is as if another spice age is coming to an end and with it the end of the age of dominance of a whole host of relationships, corporations and bonds of political patronage.
In a world struggling to stoke up sufficient demand to restore growth to moribund economies the drop in the price of oil should be welcomed. It provides one of the few avenues by which spending power can be placed into the hands of consumers. All other avenues of supporting a higher level of demand for goods and services that the global economy produces have either been exhausted (monetary policy) or are out of bounds (fiscal policy).
Long fed a diet of cheap credit and with an over-endowment of productive capacity the global economy is stuck in a liquidity trap which has threatened to spiral out of control for some time. While the decrease in oil prices may add to this problem in the short term as it puts further downward pressure on overall prices, the more dominant impact of freeing up consumers resources to increase demand will make itself felt sooner or later (hopefully the former). In the meantime it is best to view the sudden abundance of cheap energy a bit like the breaking of a drought. The life giving water which so many have been waiting for will also cause those who are most enfeebled as a result of the drought to get stuck in the mud and perish before the grass returns and the flooding recedes.
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