Too Much Of A Good Thing? Everyone I talk to who is not directly involved in the markets loves to tell me how great it is that Crude Oil prices have dropped so precipitously in the past few months. Heck, I love it that I filled up my car for $40.00 this weekend. It seems just last year I would get charged $40.00 for just driving by a gas station. All is right with the world then right? Lower prices mean more money for people to spend and the cost of business is a lot cheaper for a lot of companies (think airlines and logistics). What could possibly be bad about this? One, there are a lot of local economies that have a very (overly) strong tie to Crude Oil like Alaska and North Dakota. Those are pretty small economies though right? Ok, I will give you that. But consider the tax revenue generated from tax on gasoline. That will hit the already stretched coffers of state governments. Ill tell you that my home state, Illinois, doesnt have a whole lot of wiggle room when it comes to tax revenues. We have not even addressed the geopolitical instability this is causing in places like Russia and Venezuela. The Eurozone has not enjoyed the full effect of lower Crude. Didnt Brent Crude go down at nearly the same rate as WTI you ask? It did, but the Euro went right down with it. Crude really started its move down in early October when the Euro was trading ~1.27. It’s now trading ~1.19 today. That is a devaluation of about 6.3%. And finally Bloomberg notes: “Large and rapid rises and falls in the price of crude oil have correlated oddly strongly with major geopolitical and economic crisis across the globe. Whether driven by problems for oil exporters or oil importers, the difference this time is that, thanks to central bank largesse, money flows faster than ever and everything is more tightly coupled with that flow.” Proceed with caution and be careful to look at things through more than just one lens.
Posted on: Tue, 06 Jan 2015 17:43:35 +0000