Get Ready for $10 Oil?

Economist Gary Shilling has been preaching a deflationist view for several years.

About one year ago he wrote how deflation will continue to haunt Europe.  The Euro has dropped about 20% against the dollar since then.

And two months ago Shilling suggested the price of a barrel of oil would drop to $20.  Now he argues for $10.

Is the price of oil ringing a bell we should clearly hear?

The biggest problem deflation brings to a society is slow to absolutely no growth in the economy.  Or worse: contraction.

Imagine there's something you want to purchase, but you see that prices keep falling.  As you wait, you are reasonably delaying your purchase to capture a lower price.

What impact does that have on companies that want to sell to you now?

Japan has been deflationary, stagnant and suffering for over twenty years. 

Is the U.S. next?   PB
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From Gary Shilling writing at Bloombergview.com:

At about $50 a barrel, crude oil prices are down by more than half from their June 2014 peak of $107.

They may fall more, perhaps even as low as $10 to $20. Here’s why.

U.S. economic growth has averaged 2.3 percent a year since the recovery started in mid-2009.

That's about half the rate you might expect in a rebound from the deepest recession since the 1930s.

Meanwhile, growth in China is slowing, is minimal in the euro zone and is negative in Japan.

Throw in the large increase in U.S. vehicle gas mileage and other conservation measures and it’s clear why global oil demand is weak and might even decline.

At the same time, output is climbing, thanks in large part to increased U.S. production from hydraulic fracking and horizontal drilling.

U.S. output rose by 15 percent in the 12 months through November from a year earlier, based on the latest data, while imports declined 4 percent.

Something else figures in the mix: The eroding power of the OPEC cartel...

With new discoveries, stability in parts of the Middle East and increasing drilling efficiency, global oil output will no doubt rise in the next several years, adding to pressure on prices.

U.S. crude oil production is forecast to rise by 300,000 barrels a day during the next year from 9.1 million now.

Sure, the drilling rig count is falling, but it’s the inefficient rigs that are being idled, not the horizontal rigs that are the backbone of the fracking industry.

Consider also Iraq’s recent deal with the Kurds, meaning that another 550,000 barrels a day will enter the market.

While supply climbs, demand is weakening... look for more big declines in crude oil and related energy prices...
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Link: http://www.bloombergview.com/articles/2015-02-16/oil-prices-likely-to-fall-as-supplies-rise-demand-falls

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Oh, by the way, Warren Buffett sold all of his Exxon stock.