With the latest declines in oil price and commodities in general, what do folks think about a possible deflationary scenario emerging? Did anyone see oil going below $65 and COP going below $60? What are the oil bulls like zeal saying and I would be interested to know how folks think the drop in oil prices will work for other equities.
I think if commodity prices keep dropping, we may well enter a state of deflation next year. With real estate going bust and recession on the horizon, there is not much support for oil prices to hold up barring geo-political tensions. The argument for peak oil seem to be losing ground as the latest discovery of the oil reserve by Chevron indciates and as production from oil sands become more cost efficient with technology. Also, if OPEC reduces production since there is not the same demand, it will remove the “peak production” premium from oil. As per Fed, the biggest concern for inflation has been high energy prices. If oil drops and economy still slows to snail pace due to housing then we may as well enter a cycle of deflation where comodities, housing and equities will all lose value. It will be great for savers and bad for investors or speculators.
However, as per previous experiences, our Fed seems to be more capable of handling deflation than inflation. Maybe they will come to the rescue again by cutting rates drastically, considering the mid term elections, presidential elections in 2 years, etc?. What do folks think?
I now realize that oil prices were temporarily too high due to speculators. OPEC has been at max capacity for a few years, and will keep pumping at that high capacity, even though there is an oil surplus now. I do think we are at peak oil, but I just can’t explain the volatility of oil. Now I understand why the oil and food prices are not in core CPI; they are very volatile. Chevron’s find is a drop in the bucket, and if it had any effect on oil prices it would be psychological only. Oil sands have been around but are expensive to pump, so oil must be at $70/barrel or higher (I think) before it is cost effective to extract oil.
Perhaps commodities are dropping due to changes in pricing by speculators. Are they forward looking, seeing the global slowdown?
The Fed tried to slow the economy by raising interest rates, and it is starting to work. So what is the difference between a slowing economy and deflation? Aren’t energy and commodity prices, which are volatile anyway, supposed to drop when the economy slows?
When rent, health care, tuition, and groceries drop in price, then I will believe deflation is here. If we truly had deflation, the CPI would be negative.
Mish is convinced of deflation, and Eric Janszen of iTulip.com talks about the kaPoom theory: high inflation followed by deflation.
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