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Old Today, 06:12 PM
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Remember the Asian economic downturn of the late 90's, when oil prices fell because of decreased demand in Asia, to the point that gasoline was less than a dollar a gallon here? I remember paying $0.79/gallon at the pump, an absolute price I hadn't seen since before the Arab oil embargo of the mid 1970s, and when you consider that there had been 20 years of inflation, it was probably a price that we hadn't seen since even earlier than that.

Well, that could be coming again soon. The demand for jet fuel is down, what with decreased flights to and from China. Chinese factories in Huabei province are shut down, and if the coronavirus spreads, more factories will be shut down. Then we have factories outside of China (like Hyundai in S. Korea) that are dependent upon Chinese-made parts, that will shut down, too. Fewer factories running, less demand for oil.

In 1998, oil bottomed out at $13/barrel, adjusted for inflation. To give that context, we're at about $50/barrel now, last peak was in 2008 at $145, last trough was in 2016 at about $30/barrel.

Here's a nice historical chart, with prices adjusted for inflation.


So, we're likely to have a huge oil glut soon. In the past, Saudi Arabia has reduced production to shore up the price per barrel, because they've got such huge financial reserves that they can take the hit to income, and they'd rather keep the oil in the ground and sell it for a higher price, later on. But Russia is also a big producer, and this time, Saudi Arabia is demanding that Russia cut its production, too. Putin won't want to do that - Putin needs the money for his military expansion So he's balking. If Saudi Arabia decides not to cut production unless Russia also cuts production, we're going to have a tremendous crash in the price of oil.


This could lead to some interesting times. First of all, investing in energy stocks at the bottom could be a very wise move. Second of all, cheap energy will help soften the hit to the economy that is going to come from the inevitable economic slowdown if China's factories and economy slows. But if the coronavirus gets out, and we have a pandemic, no matter how cheap energy is, it won't be able to soften the enormous blow to the economy that the pandemic will cause.
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