What comes first, the chicken or the egg?

Is a lack of economic growth about to cut demand, and prices, for oil – or is a lack of oil cutting into economic growth?

Stay with me for a second… What does the early economic reaction to lower oil supply look like? Would the headline read: “demand for oil fell this month to”, or “supply of oil fell this month to”? It would look the same, and it would be a “glass half empty or half full” kind of moment, wouldn’t it? Demand, as measured in classical economics, cannot exceed supply as the price mechanism simply chokes off the demand and substitutes appear (what substitute there is for oil, I don’t know). Supply, however, can exceed demand, at least in the short run. That is what inventories are all about.

Looking at the supply and inventory data from the EIA and the price signals from crude oil, my interpretation is that a lack of oil is cutting into economic growth. If the oil supply cannot be expanded, further growth will be impossible. And if that is true, then (you know, that if/then sequence again) further economic growth will not be possible. And if that is true, we are in for one wild ride as the market re-prices all of the myriad financial assets. And if that is true, ______________ (go ahead, YOU fill in the blank)

Yours for a better world,

Mentatt (at) yahoo (dot) com