The Price Of Oil And Consumer Confidence
A few weeks ago on my radio show, I had an old friend join me to talk about oil. Chad Hathaway, the founder and CEO of Hathaway LLC (a California oil company) started his company a bit more than a decade ago from scratch. He has since grown it to produce about $25 million in oil each year (at $100/bbl). Since prices have been plummeting, I thought it would be great to hear how this was affecting him and his industry. Plus, a bit of insight from the “horses mouth” might be great for dispelling myths.
Chad talked about the difference between the current downturn in energy prices compared to the last major downturn in 2008 and why this may have nothing to do with an upcoming economic downturn. In fact, perhaps his testimony might be suggesting the opposite. The primary difference between then and now is fundamental: supply and demand.
In 2008, the United States was fully into a recession with distressed homeowners, rampant job losses, unprecedented governmental action, currency illiquidity, etc. Consumer confidence hit extreme lows largely due to fears of job losses and/or declining incomes. This translated to the enormous reductions in demand for goods and services which also later caused a plummet in demand for transportation fuels. Hence, because the economy sucked, oil dropped.
The precipitous decline in today’s prices are from manipulation of the supply. Simply stated, producers are deliberately making more than consumers want to use. Why? Because the oil producers who extract it inexpensively want to put the producers who can’t extract it inexpensively out of business. Saudi Arabia said they are trying to protect their market share. Yes, this will hurt some of the oil producers focused on fracking or extracting other unconventional oil and will cause further layoffs in those industries and areas, but it will also help American consumers spend more money on other things.
Currently, consumer confidence is high, the economy is growing, and economic forecasts remain strong. In 2008, lower oil prices were the result of a declining economy, while in 2014/2015, they are related to supply side manipulation. Just because it is cloudy, it does not mean it will be stormy. So, let’s look for other clues before we run for the shelters. In the meantime, enjoy the low gasoline prices.
Listen To Brian Wiley Week Nights at 6 on 580 KIDO