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Thursday, April 18, 2013

Doug Kass: The Silver Lining

Doug Kass points out that the decline in the price of oil is a big tax cut for the consumer. Could it destroy OPEC's grip on oil prices and send the USA's economy soaring? He discusses this silver lining in Cheaper Oil's Silver Lining:

As of the end of last week, more than 70 consumer stocks made 52-week highs on the NYSE. I have tracked data on this subject personally for over 20 years, and this is a very strong number, easily in the 98th percentile of over 1,000 observations. This is a very broad market move in the defensive sector despite all the angst generated by the press, the E.U., North Korea and Washington, D.C. I sense something of significance may be happening that is not being watched closely. If I am right, a new up-leg in economic growth is possible later in the year, which could partially deflect my fears of a recession (expressed in yesterday's opener).

My background is in finance and economics.

The dismal science has laws, but they get broken. The first you learn is the law of supply and demand. Since 1973, it has not functioned well in oil markets. Another law is that, in the fullness of time, cartels eventually do not work. That law also has not functioned well, as OPEC has survived over several generations.

Nothing impacts consumer spending faster than change in price at the gas pump.

In 1973, OPEC announced its oil embargo, and the price of crude tripled. For almost 40 years, oil prices have included an oligopoly rent from OPEC (also called political uncertainty), which has trumped the law of supply and demand.

The cartel's influence may now be finally breaking down.

Today, with WTI down to $88 a barrel, gas prices are below year-ago levels, serving to provide the consumer with a tax cut. Chinese demand is ebbing, perhaps due to concern about horrendous pollution. Cars are growing more fuel-efficient.

Oil is still far above the point of zero marginal production price. The price of crude might have a lot further to go, and, in the short run, prices can go below the cost of production.

The law of supply and demand may start to apply to oil, and OPEC may be all over. Both, at least in the intermediate term, would be bullish for the U.S. economy -- the consumer sector will be delivered with a tax cut and corporations' profit margins could be buoyed. It could also be seen as a negative for the bond markets as lower commodities revive economic growth.

There is a silver lining.