PARIS (ResourceInvestor.com) -- We have been used to hearing about how volatile the market in energy has become. But after the equity market events of recent weeks, all of a sudden one has to take a different view. One that could support the notion of “peak oil.”
Think back five years and the Dow Jones equity index was recovering from dipping under 8000, hitting 7528 on Oct. 4, 2002. Then in July 2007, the market was topping off at a touch over 14000, having nearly doubled in size over that four and a half year period.
Of course roughly the same thing happened to crude oil. Slow but very steady progress has taken crude from around $30 per barrel to over $70 per barrel today. The path of crude oil has been slightly perkier with more spikes, thanks to hurricanes and various Middle East wars, and more dips, due to profit taking.
Equities on the Dow Jones, on the other hand, ploughed a flat furrow between 9800 and 10800 until the spring of 2006, when they simply took off, passing through one line of resistance after another. They had been spurred by the long term build-up of cheap credit - the build-up we are now possibly seeing undone in a very short space of time.
But for a long time, many people held that crude oil and energy would play a major part in the value of equity. First, there was the generally accepted wisdom that high crude prices dampen equities. Then we had a sea change. People started saying that the huge size of companies like BP [NYSE:BP] and ExxonMobil [NYSE:XOM] mean that if oil goes up, so in turn do those companies and so in turn do the indexes in which those companies sit.
One nagging thought at the back of people’s minds was the idea that if oil was genuinely starting to plateau in terms of production, then two different things could happen. First, the price of oil would not be so volatile. Yes, there would be ups and downs - that is obvious - but the big surges and falls would only be driven by fundamentals, such as hurricanes and wars. Then if equities were to fall, we would see that energy would remain roughly static.
And this is what appears to be happening.
Crude oil has not slumped alongside equities; in fact, since the start of the year it has built quite nicely to sit over $70-$72 per barrel, where it is now. The credit crunch has come alongside it - the debt driven mayhem that is sending equities up and down each session like a yo-yo. Energy is ignoring this process; in fact, natural gas prices are showing signs of hitting some serious peaks at a time when the equity markets have lost around 12% of their value.
Now, just for clarity, this column does not know which way the equity market will turn next. Some are worried, some are not, many simply do not know. If equities were to return to that 9800-10800 range in which they sat until 18 months ago, we would expect a fall in energy prices. We would - but right now that does not appear to be taking place. The call is early, but we always want to be first to point it out.
What could be genuinely difficult for the global economy is an unravelling of economic instruments that do not consume energy, such as paper debt obligations. Because they do not consume energy per se, we could see the start of a recession with the energy process remaining robust.
Were energy to be driven by – let us say – an attack on Iran by this U.S. administration or a bad hurricane season that effects crude production or refining capacity, then any recessionary effects are likely to be nastier and more prolonged than they otherwise would be.
This has always been the notion of ‘peak oilers’ - whackos or otherwise - who state that falling markets will be met with stable and high energy prices. No one else is talking about the possibility, so we thought we better.
