Last night crude oil fell below $US75 a barrel again. Tomorrow, OPEC meets to try to do something about it and, even if they agree to cut production (a big if), it’s unlikely to make much difference.
The 30 per cent collapse in the oil price over the past few months is the most significant economic event since the 2008 credit crisis. It’s leading directly and indirectly to declines in all commodity prices and adding to a new wave of global disinflation that has the world’s central banking firefighters once again sliding down their poles and clambering into monetary policy fire trucks.
A structural change in the oil market this year has added to the accelerating impact of industry disruption as well as automation and robotic technology to bring inflation down everywhere. More than a dozen OECD countries now have falling prices, half of them have inflation of less than 1 per cent and falling.
The fall in the oil price is not cyclical but structural: the market has been fundamentally altered by increased production in the United States as a result of innovation (fracking) and lower demand helped by a global push towards renewable energy due to the tumbling prices of solar cells and wind turbines. The price looks set to stay below $US80 for a long time.
The doom merchants who a year ago were predicting hyperinflation as a result of central bank money printing have now switched to warning of a deflationary crisis, but the question is: can too much of a good thing (lower prices) really be bad?
Falling oil and commodity prices are not great for commodity producers like Australia and Russia, but overall it’s as good for the global economy as expensive energy is bad.
BHP Billiton this week gave a pointer to what it means for commodity producers: cost cutting, and then more cost cutting.
In a way, the other set of redundancies announced on the same day -- by the ABC -- was a consequence of the same thing. With commodity prices declining, the Australian government will be forced to find more budget savings to prevent a further blowout in the deficit.
In the same vein, companies in most industries are facing cost pressure because of competition from new technologies. Disruption, and how to deal with it, is the subject of most corporate off-sites now.
“Peer to peer” suppliers like Uber (taxis), Airbnb (accommodation), Trip Advisor (travel) and Lending Club (banking), in addition to the well-established disruptors like Google, Facebook and Amazon are disrupting a wide variety of industries and causing previously dominant players to lose all control of pricing.
On top of that, automation and robotics are starting to replace more and more middle class jobs. Robots used to just do dumb repetitive tasks; now they are doing smarter repetitive tasks, such as driving trains and even surgery. The good news is that train fares and the price of surgery falls. The bad news is that train drivers and surgeons are out of work.
The question facing policymakers, not to mention investors and everyone else for that matter, is whether these three great disinflationary forces – energy, disruption and robotics – are benign or dangerous.
The 19th century was characterised by persistent deflation caused by similar forces unleashed by the industrial revolution, electricity and the internal combustion engine. But it was also littered with financial and banking crises, as debtors were repeatedly hit by margin calls and banks became insolvent.
Central banks are currently in a desperate battle against deflation to protect the world’s debtors and banks from a similar fate. After all, the amount of debt and the degree of bank leverage now is far greater than 150 years ago.
But the big surprise of 2014 is that monetary policy is not working -- at least on consumer price inflation (it’s working just fine on asset prices).
Bond yields have been falling, not rising. China has just cut interest rates, the talk is of another rate cut in Australia, Japan has embarked on more QE and Europe’s central bank says it will.
Yet low inflation also means rising real wages. Demand is weak not because of falling prices causing consumers to put off purchases but because of high debt levels and population ageing.
The world’s economists and policymakers are in new territory.
Innovation, including in the production of energy, is driving prices lower and shifting power away from producers to consumers, and that process has only just begun.
Maybe they should stop fighting it.