Oil, the Stock Market, and the Folly of Youth

Bearing what all these crazed, hooked nations need, steel plate and long injections of pure oil

                                                                       Gary Snyder,   Oil

Most men, when they reach a certain age, develop a habit of looking back at their youthful stupidity, sometimes regretfully, sometimes fondly. Many of them — myself included — ponder various flirtations they may (or may not) have had. But most men don’t — unlike me — think of their flirtations with bad poetry. I’m not sure what this says about me, but with oil prices much in the news over the past year, this piece of doggerel by “Beat” poet Gary Snyder has popped into my head more than a few times.

I believe I first encountered it as a high school student. At least I have a vague recollection of sitting at my grandmother’s dining room table reading the book of poems that contained Oil. Why would a reasonably normal high school boy spend part of his hard-earned McDonald’s paycheck on a book of poetry instead of, say, a date? Two possible explanations come to mind:

— I had read On the Road by Beat scribbler Jack Kerouac. The novel is essentially a pseudo-intellectual paean to extended adolescence, grown men hitting the road in search of greater truth, but finding mostly easy women and easier inebriation. In this respect, I was normal; what’s not to like for an 18-year old boy? So, anything “Beat” was likely to catch my eye.

— This was, after all, the apocalyptic early ‘70’s. The intellectual luminaries of the day were all Malthusians –disciples of Thomas Malthus, the 18th century political economist who believed that while population increased exponentially, the means of subsistence did so arithmetically, so men were consigned to lives of misery and vice.   Think Paul Ehrlich’s The Population Bomb, or The Club of Rome’s The Limits to Growth. Art Laffer wouldn’t sketch his famous curve on a napkin until 1974 and Jack Kemp wouldn’t write An American Renaissance until 1979, so what else could an impressionable boy do but dance to the tune of one of the pied pipers of scarcity and doom?

Well, it’s 2016, and the oil disaster has finally struck. Our long addiction to what Snyder called a “drug for industrialized society”* has caught up to us, and we’re running out. Gas is $20/gallon at the pump, the 7th Fleet is steaming towards the Black Sea to try to prevent Russia from gobbling up Saudi Arabia, and the Gulf of Mexico is an eco-wasteland, awash in the detritus of hundreds of Deepwater Horizon type disasters as we futilely drill for the last drop.

I’m sorry. All that sturm und drang is just a scenario for a short story I never got around to writing in 1972. We are in the middle of an oil “disaster”, but it’s one brought on by abundance, not scarcity. “Saudi America” is now the largest producer of hydrocarbons in the world, and the worry is that since the production of oil now plays a larger role in our economy, its price decline will have a spillover effect and cause a recession.

Total Petro

As you can see from the chart below, the spread between investment grade debt and lower-rated high-yield energy debt – a measure of distress in the energy sector – has reached levels surpassing those of the 2008 financial crisis, affecting all high yield debt.

Hi-Yield Credit

With many smaller oil companies scrambling to restructure balance sheets and generate cash flow, this makes sense. What does not make sense, I believe, is the worry that these oil patch troubles will lead to a recession. Not too long ago, conventional wisdom said that every recession in history was caused by higher oil prices, and now that wisdom has been stood on its head! Brian Wesbury has opined that this fear is just another example of skittish investors looking for the next “black swan” event that will crash the stock market and the economy. ** One day it’s the PIGS, next it’s China, and now it’s oil.   Oil production is still a small part of the overall U.S. economy, and lower oil prices will have a positive effect in many areas such as chemical manufacturing and consumer spending. Though things “may be different this time,” all the large oil price declines in the past 30 years have been followed by strong stock market returns one year later.

WTI

Source: Hartford Funds

 

* Gary Snyder Interview 6/10/12

** Wesbury 101, Oil and Stocks, 1/26/16

 

The information contained in this report does not purport to be a complete description of the markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Don Harrison and are not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

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