[Marxism] [Pen-l] Michael Roberts on the collapse in oil prices

Marv Gandall marvgand2 at gmail.com
Mon Dec 8 13:18:47 MST 2014

On Dec 8, 2014, at 1:42 PM, raghu <mraghu01 at gmail.com> wrote:
>> On Mon, Dec 8, 2014 at 10:42 AM, Marv Gandall <marvgand2 at gmail.com> wrote:
>> According to Roberts, however, “the most important aspect of the collapse in the oil price is the spectre of global deflation”. Though most mainstream economists think lower oil prices will stimulate consumer demand and economic growth, this is likely to be offset, in his view, by falling profitability, the widespread failure of the most indebted firms, and the global spread of the economic crisis now brewing in Russia - “this time based in the non-financial productive sector of capitalism.”
> I don't understand this argument. Isn't this a "good" type of deflation i.e. the kind that comes from an increased supply of a vital input commodity, rather than a decreased level of demand?
> [...]

Opinion is divided, mainly because lower energy costs may not be enough to revive spending by    US workers whose real incomes have declined and who are still working off debt. There is also some worry on Wall Street, but not enough to stop exuberant investors, about the potential for default by oil-producing companies and states and the resulting bank crises which have typically accompanied sharp price drops. From today's Wall Street Journal:

Falling Oil Prices: The Good and the Bad
By E.S. Browning
Wall Street Journal
December 8 2014

The oil-price decline of the past six mgonths has been stunning.

On Monday morning, crude-oil futures were trading at $64.27 a barrel in New York. That was down 40% in less than six months and marked the lowest price since July 2009, just after the end of the financial crisis.

Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings and lessen pressure on the Federal Reserve to raise interest rates.

The stock market loves that mix.

But falling prices aren’t an unalloyed benefit. They also reduce the incentive to develop new oil and gas fields and make it less urgent to create alternative energy sources. That hurts companies in those areas and, because it makes energy less plentiful, means higher costs and fewer energy alternatives once global demand revives.

“On balance, I think it is an overwhelming positive. It is a tremendous transfer of wealth from producers to consumers,” said David Joy, chief market strategist at Ameriprise Financial Inc., which oversees $810 billion. But “there is clearly a debate about this.”

So far, he points out, reports on year-end consumer spending haven’t been strong. If spending doesn’t pick up much, the main benefit of lower oil prices to economic growth won’t be felt, and fears of global deflation will spread.

Low-end retailers such as Costco Wholesale Corp. and Wal-Mart Stores Inc. have reported some sales improvement in recent weeks, as have some restaurants, said Henry Herrmann, chief executive at Waddell & Reed Financial Inc., which oversees $130 billion in Overland Park, Kan. New-car sales also have been strong, he said.

Friday’s November jobs report showed a small pickup in wages, which also should help consumers.

But surveys show that many consumers still feel as if the U.S. is in a recession, Mr. Joy said. Many have had little or no inflation-adjusted wage gains for years and still face significant debt, which has kept them from going back to their old spending ways.

“The general mindset of the consumer is still very cautious. You don’t see a robust start to the holiday shopping season and the housing sector is only modestly improving,” he said.

Consumers may be trying to pay down debt, which would be good for their longer-term finances but wouldn’t help economic growth right away.

Fears also spread last week of a debt default by Venezuela, a troubled oil exporter, and of further financial strains for Russia. Russia’s 1998 debt default threw the financial system into turmoil, although few analysts are forecasting a repeat.

Aside from oil-related companies, worries focused on railroads, rail-car manufacturers, leveraged bank loans and firms that supply big oil companies, Mr. Herrmann said. His firm has cut way back on holdings of junk bonds issued by energy-related companies, he added.


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