Cheap Oil: is Deflation Next?

Further observations from Gary Shilling on the fall of oil prices.  PB
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From Gary Shilling writing at Bloombergview.com:

... [the] last column explained the dangerous game of chicken Saudi Arabia is playing with other major oil producers, including U.S. frackers, to see who can withstand low oil prices the longest before slashing production.

That price may be as low as $10 to $20 a barrel, or even lower.

Start with the winners from the faceoff, which include the U.S. in general -- the country still imports more than a quarter of its energy needs -- and American consumers in particular...

Losers from falling oil prices obviously include U.S. producers and oil-services companies, especially those that took on large amounts of high-yield debt during the oil-price boom...

Among the hardest hit are those nations that rely on oil for much of their government revenue and were in financial trouble before prices plunged.

Venezuela ... African exporters Ghana, Angola and Nigeria, where oil finances 70 percent of the government’s budget... Russia, where Western sanctions over Ukraine and tumbling oil prices are threatening it with a rerun of its 1998 default...

On balance, energy consumers win and energy producers and exporting countries lose.

Yet two important questions remain.

Will energy-driven deflation, now in evidence in almost half of the 34 major developed countries, spread to prices in general?

If so, will that encourage potential buyers to wait for still-lower prices in a self-reinforcing spiral that spawns more deflation and slow, if any, economic growth?

In today’s world, with so many weak and troubled economies, general and chronic deflation is likely.

Second, will the fallout from deleveraging in the energy industry worldwide spawn a major shock and global recession that shifts the investment climate from “risk on” to “risk off”?

As with the financial excesses revealed by the housing collapse, there’s probably much higher leverage among energy-related companies and countries than is now apparent.

As Warren Buffett once said, you don’t know who’s swimming naked until the tide goes out...
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Link: http://www.bloombergview.com/articles/2015-02-17/enjoy-cheap-oil-fear-the-deflation