Oil Collapse Threatens Universe

George Ure at Urban Survival blows my mind with this information today about the Oil Collapse:

Oil Price Collapse

Oil Price Collapse

But for the past many months I have been telling you what? ‘

That right: Oil could collapse into the $30s per barrel.

That’s because the world is in the grips of a gigantic deflation the likes of which have never been seen before and that in itself is remarkable and worthy of discussion.

First, however, we need to be clear that a barrel is not a barrel. If you are talking about the ubiquitous 55-gallon drums, popular in American chemical, refining, and coatings, that’s not what a barrel of oil is: Write this down: Oil is 42 gallons per barrel.

Just how cheap is oil, right now? Well, if you drop by the local convenience store this morning, oil is cheaper than your coffee by a damn-sight. Grab a bottle of that water (a large Desani or Aqu-What’s-It) and you will pay more for the water than for oil. (Admittedly, there’s a price off convenience and maybe if water folks made a 42-gallon size. Even so, compare oil to those 5-6 gallon water jugs at the store.

While all of this may sound like really, really good news, oil breaking into the $51 range this morning increases the odds of panic in financial markets this spring. Think you could wake up to a Dow 2,500-4,000 points lower than where we are right now before summer? Don’t bet against it.

Part of the reason oil was so high (for so long) is the Fed’s quantitative easing. Usually when there’s a big recession (remember 2007-2010?) prices come right down, everyone sees a bargain, and recovery begins.

Unfortunately, what the Fed’s money give-aways have done is set a semi-permanent deflation expectation in place. While the QE money kept deflation from becoming obvious (and wage collapsing, and even more massive unemployment) it is now off the table and the price of oil is dropping quickly.

Let’s run a number or two to show economic impacts: Let’s say you bought a car getting 18 MPH highway, $4.25 Gas and drove 100,000 miles. Total fuel bill? $23.611.

Fast forward to my son’s car (Versa) mostly highway and around 37 MPG and gasoline we’ll use Triple A’s national average of $2.199. Driving it the same 100,000 miles, his fuel bill will only come to $5,943 and change.

This is whatcha call an economic shock. Car costs (on a real cost per mile basis) are down to about 1/4 of where they were in the past 7-years. This is deflation and huge deflation at that.

Oil could drop down to the $50 range. But if it can take out $50, why not $48? And then what holds it at $45? You see how this goes.

One Response to “Oil Collapse Threatens Universe”

  1. Good rule of thumb: don’t be the second guy to panic.

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