The Saudi-Russian Oil War is going to set the deflationistas hair on fire.  What is wrong with the relative price of oil collapsing?

A big flop in the price of a headline commodity almost always brings out a deflation panic.  We have yet to see any sustained general deflation in our lifetime, however.

Yes, the price of big-screen televisions is tanking but rents and health care are screaming higher.  Furthermore, we have a strong conviction that the price inflation is under measured.   Please, folks, don’t mix relative price moves with deflation, where the general level of prices is falling over a sustained period.

It does seem the Fed, and, for sure, the market geniuses define deflation as falling stock prices, which is one of the very reasons they find themselves in the current unpleasant situation.   The central bank can’t even attempt to close the oven door due to fears the Japanese soufflé pancake will collapse.

Politics Of Falling Crude Prices

The fall in the price of oil is a very similar dynamic of the trade-off between the winners and losers of international trade.  More than 225 million American automobile drivers will benefit from the drop in price but the roughnecks and real estate speculators in, say, Midland, Texas are going to get hurt bad.

Should the U.S. government then implement policies to prop up oil prices to protect oil and gas mining jobs, which total only around 157K?   By now, I think you know our view.

Nevertheless, it depends on the political strength of domestic oil producers.

In 2019, about 142.23 billion gallons (or about 3.39 billion barrels¹) of finished motor gasoline were consumed in the United States, an average of about 389.68 million gallons (or about 9.28 million barrels) per day.  – EIA

For every $.25 drop in the price of gas as a result of the crude price flop, domestic consumers are set to save about $100 million per day.   A nice tax cut, indeed.

Saudi Arabia plans to increase oil output next month, going well above 10 million barrels a day, as the kingdom responds aggressively to the collapse of its OPEC+ alliance with Russia.

…“This is going to get nasty,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “OPEC+ is going to pump more, and the world is facing a demand shock. $30 oil is possible.”

Oil traders are looking to historical charts for an indication of how low prices could go. One potential target is $27.10 a barrel, reached in 2016 during the last price war. But some believe the market could go even lower.

“We’re likely to see the lowest oil prices of the last 20 years in the next quarter,” said Roger Diwan, an oil analyst at consultant IHS Markit Ltd. and a veteran OPEC watcher, implying that the price could fall below $20 a barrel.  — Bloomberg