Are you filling up the tank or are you buying just enough fuel to get you through the next few days? Are you betting that by the weekend the gas price will have tumbled again? If you are, like me, watching meanly and clutching your wallet as the oil price slides, you are contributing to the deflationary anxiety that is gripping the markets.
Cheaper gasoline was supposed to be a good thing and, initially, the view was that the savings from a lower fuel price would restore confidence among households in oil-consuming nations. That logic helped to boost markets in a strong rally from mid-October. Yet, over the past few weeks the notion is gathering strength that the oil price collapse could lead to a deflationary downward spiral.
The sight of Russians frantically spending rubles as their value plunges is fuelling the hysteria. The falling crude price is feeding into European inflation statistics; within the EU, prices in November rose at the smallest rate for five years, adding to the anxiety that the world's consumers will just sit on their hands, waiting for everything to get just a little bit cheaper.
Anyone whose livelihood depends on the spending habits of the petrodollar crowd is certainly in trouble. Russians who have not already stashed their cash in foreign dollar deposits will be staying at home, rather than frolicking in Alpine ski resorts. The Scotch whisky export industry has already signalled weaker exports and the outlook cannot be good for the sale of high-end luxury goods – the makers of fancy watches, sports cars and yachts may be heading for leaner times.
These jitters serve to remind us that underlying the current glut of oil is the relatively unnoticed phenomenon of weak demand for fuel. The developed Western world is getting by without significantly raising its consumption every year. If the income of the oil-producing nations has fallen by almost half, we can expect that demand for fuel in the Middle East, hitherto one of the main regions of rising consumption, will also weaken.
Add to that the slowing manufacturing motor in China and we have a recipe for longer-term lower oil prices, rather than a sudden bounce-back to $100-plus per barrel. We could be heading for a secular change where the global economy has begun to disengage itself from more than a decade of enslavement to ever-rising commodity prices. Copper has fallen 16 per cent this year, cotton is down by almost a third and the corn front month futures price has halved from its peak in 2012. Since June, the S&P GSCI, an index of commodities prices, has fallen by 30 per cent.
Russia is paying the price for being a one-trick pony, reneging on the promise made by President Vladimir Putin that he would diversify the economy. Instead of investing in Russian brains, he chose to pump iron. He swaggered and pandered to Russia's oligarchic business class and a tribe of corrupt officials who ride on their coattails. The same is true for almost all of the emerging market commodity producers but for most of the capitalist West, this commodity collapse is unalloyed good news.
Thanks to better technology, the world is becoming more efficient at producing and using raw materials. The efficiency gain is finally beginning to filter through into the pockets of consumers. The incomes of ordinary Americans are rising again: the plunging gasoline price will save them about $125-billion (U.S.), says Goldman Sachs. Divide that windfall among the country's 115 million homes and it represents about $1,100 for every household. Add to that the clear signal that average wages are rising again and we can expect middle-class American families to have several thousand more dollars to spend next year.
For Canadians watching their currency buckle under the commodity bust, the future might seem worrying at first sight. That is to ignore the alternative: a world in which its biggest ally and customer is struggling with low growth and in thrall to the supply of energy from a cabal of corrupt, violent and autocratic suppliers. Instead, Canada needs to adjust to a more competitive landscape; a world where abundant resources are not a solution. Indeed, Canada's main customer is now a global manufacturer of energy products, turning cheap crude into higher-value diesel and jet fuel and exporting it around the world.
Russia's terrible plight reminds us that over the long-term a successful economy needs to do more than make huge piles of minerals in the hope that a boat sails by to take them away.
Carl Mortished