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Is Another Oil Head-Fake Brewing?

Is Another Oil Head-Fake Brewing?

charleshughsmith.blogspot.com / CHARLES HUGH SMITH / THURSDAY, AUGUST 03, 2017

The dramatic declines in the costs of oil production will be boosting supply at the very moment that demand is falling.

Over the past decade I’ve addressed what I call Head-Fakes in the cost of oil/fossil fuel: even though we know the cost of extracting and processing oil will rise over time as the easy-to-get oil is depleted, oil occasionally plummets to such low prices that we’re fooled into thinking it will remain cheap for a long time to come.
This drop in price is a head-fake, because over time the depletion of the cheap-to-extract oil will push global prices higher.
Why does this matter? Economists have noted for decades that spikes in energy costs tend to trigger recessions for the obvious reason: the more households and businesses spend on energy, the less they have to spend on goods and services.
When the price of oil drops, people buy larger, fuel-hungry vehicles because the operating costs are reasonable at the moment of purchase. The need to conserve declines across the board, setting up a high consumption level that establishes a high cost basis when oil returns to its “natural” price levels.