Hi Altair19,
The specter of higher oil prices will lead to higher inflation. It will be a drag on corporate profits. Uh oh, earnings worries. Consumer spending will plummet. The US market will have a hard landing. The Fed won't lower rates; heck they'll raise them to head off inflation. While there at it they'll lower the money supply too. Inflation will ramp & unemployment will rise. Foreign markets will crumble as they are less capable of absorbing the costs of oil & the US will be buying less of their exports too. Bread will be $5/loaf. Gas $4/gal. A vicious circle of horrific events will feed on themselves & the world will have its first depression of the millennium.
FWIW, I think concerns over current oil prices were also a great excuse by the houses today to soften the markets.
Cold this all happen? Sure, why not? Will it? I don't think so. As JW said, over the last 10 yrs, oil has increasingly become much less important to the economy. At the same time technology is allowing productivity growth that has never been witnessed before. Sure, high energy prices that remain at these levels or higher would be problematic though as these are historically high prices. If they can't be brought under control, it will drag more & more on the economy & could lead to ramping inflation. However.....
Look at oil over the last year or two. It just hasn't been able to ignite runaway inflation when prices were high, nor cause deflation when prices were incredibly low.... soooo..... me thinks there must be some reasons for that.
I recall that when oil was below $15/bbl, inflation was about the same as it is now. Regardless of other events affecting the economy at that time, inflation did not plummet because oil was $8 or $9/bbl. Since oil crossed $25/bbl, inflation has remained about as tame as when oil prices were low, regardless of other events that could affect the economy. That supports my opinion that oil is just not as important to the economy as it has been.
To me, the question becomes; will oil remain over $30/bbl? If so, I would agree it will become a problem.
Me thinks that there will be mucho incentive for non OPEC oil to come on line. Technology has allowed costs of finding new reserves go down. Technology has allowed costs of extraction of oil go down significantly. Per a report I read from XOM, improvements in extracting oil have reduced extraction costs..... even on the tougher patches, I believe they said well under $20/bbl there....
Consider that higher oil prices will be an incentive to open wells that shut down when oil was below $10/bbl. New technology will open wells that weren't profitable to operate in the past. Drilling for new sources has been expanding & more new reserves are constantly being discovered..... many are non-OPEC reserves. There is plenty of oil to be had & the prices are at historic highs.
Supply will be made available as quickly as possible to take advantage of these historically high prices me thinks.... Even if oil sinks to $25/bbl, there will be more & more wells pumping black gold. New technologies will increase the known reserves that will be opened & pumping black gold even at those considerably lower prices..... at $30+/bbl, there are huge profits to be made.... all the way down to $20/bbl....
Oh & let's not forget that OPEC historically cheats. Many of these countries got burned bad when oil was below $15/bbl. At $30+/bbl, the temptation to fill those coffers will be high. Supply, supply & more supply..... with incentives for huge profits if you bring your oil to market today. Why sit on it when it's at historic highs?
I think that productivity is increasing & technology is revolutionizing the world, not just the oil industry. It's pervasive & we are just starting to make use of its potential. Me thinks productivity will accelerate as we learn how to fully utilize it. By then, there will be newer & better technology.
If oil prices defy all I've discussed & remain high or go higher, we will have problems. I certainly don't think the odds favor this happening. Supply & demand will find equilibrium as with any other market.
Thanks for your thoughts though. Hope you can appreciate my position.
Have a nice weekend,
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