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One of the most astounding stories of 2008 has been the roller-coaster ride in crude oil prices. After several years of steady increases, a burst of speculative activity in 2008 pushed the price above $145 per bbl in mid-July. This produced a windfall for the speculators (who exited the market in time), nefarious petrol states (Russia, Venezuela, Iran et al) and the oil companies. It also squeezed consumers terribly. In my opinion, the related rise in gasoline prices was the straw that broke the camel’s back in the housing market, as overstretched mortgage holders had no savings or credit to fall back on to absorb the dent in their cash flow.
So congratulations to OPEC, the speculators and assorted market makers who produced this result. You have killed the Golden Goose. Oil spikes produce recessions, a time-honored linkage that you ignored in your hubris (see Paul Cella’s excellent article on hubris today). You can manipulate output all you want or jawbone markets with juicy rumors to move the price. It won’t work. In recessions, oil barrels are a true commodity, a dime (maybe literally at some point!) a dozen.