I have no idea how many of my readers are sophisticated in finance and economics. I assume it is a high proportion.
We are currently experiencing one of the most dramatic change in oil prices in my lifetime. Crude barrels of Brent, (which is not a location, it is a class of light viscosity low sulphur oil) have dropped from over $90 to under $45 in roughly 4 months. This is a very dramatic change.
$45 is below the level at which the Calgary tar sands can be extracted, making the XL pipeline somewhat irrelevant at the moment. $45 a barrel is my calculation of the price of oil if it were directly substituted for the current three dollar price of natural gas. Possibly a long run equilbrium price.
This point of intersection is probably irrelevant for now. I don't see many people changing their cars or trucks to natural gas. However, many electric generating plants are doing precisely that.
The dramatic fall in the price of oil is clearly understandable because of the global oil glut largely driven by oil fracking and to some extent by the willingness of Saudi Arabia to keep pumping oil at full output.
Most other countries who contribute to global oil Russia, Nigeria, Venezuela, Iran and Libya have little choice or no choice. They can't cut back production. Oil is their only source of revenue. The Arab Emirates can only survive a short while at the current price.
Cuba begged for American assistance because of the oil price, knowing that socialist Obama would help them, just as he helped fund bankrupt Democratic Detroit in their desperate straits.
The most important element of this economic phenomenon is that it will have repercussions on everything on the planet. Transportation, retail, manufacturing, primary goods and all other natural resources. Taxes, governments, military, international relations. Everything.
At the same time: We have actually been in a global deflation, just like Japan, since 1991, except that in the United States some domestic monopolies such as healthcare, housing and education have obscured the real deflation.
Economists and central banks everywhere have been having an hysterical fit over deflation. They consider it to be bad. They are stuck with my namesake ‘the Phillips curve’ which shows that inflation correlates positively with employment. Therefore, they want to have some inflation to promote employment. They aren't getting any inflation at all. We are at zero interest rates and in negative interest rate territory in many parts the world.
To me deflation is a way to put money in the pockets of the middle class who benefit the most from falling consumer prices because they consume at levels that are disproportionate to their income. So central banks and governments everywhere are working against the middle class and have been for decades.
There is a perverse effects on deflation of low oil prices, when oil and deflation work together. This is an appropriate time for a significant financial correction.
The problem I see is that the Federal Reserve and the new Elizabeth Warren economic banking environment have created a serious crisis promoting mechanism.
The Federal Reserve now handles short-term money emergencies, the so-called repo market. The Federal Reserve is inadequate to handle this formerly private safety mechanism.
We all get to see the forces of a financial crisis at work and at the same time to see the old crisis prevention mechanism that isn't working at all.