Musings: Random Thoughts Bothering The Energy Market

With the reporting of December's consumer price index (CPI) decline of 0.7% last week, it brought the full year increase to only 0.1%, the smallest increase in 54 years. While the core CPI index was flat in December, for the full year it increased 1.8%, the smallest yearly increase since 2003.


The CPI report was cited as another sign of the trouble the global economy is in due to falling prices. It resurrected the fear among economists and politicians about deflation gripping the economy creating serious government fiscal and monetary policy challenges. Deflation was one of the major maladies that controlled the economy during the Great Depression and forced significant governmental economic stimulus, yet which wasn't truly successful in boosting the economy until the stimulus came from World War II. The best explanation of the deflation issue is demonstrated by the chart in Exhibit 23.


It seems to us that the U.S. economy is somewhere on the down slope but not as far down as devaluation. The somewhat scary thought is that we could experience the protectionism and tariff problem early in 2009 as the newly elected, Democratic-controlled Congress decides to flex its muscle in order to save ailing industries. Our sense is that many of our customer and supplier governments will not stand-by idly and watch their economic health be damaged by U.S. government trade policies. This fear is augmented when we look at the chart in Exhibit 24 that shows the recent collapse in November and December exports for many leading economies.

If the world's economies continue to contract as they did at the end of last year, then we will have a serious challenge in restarting the U.S. economic growth. One hopes that the collapse in exports at the end of last year reflects more of a reaction to the fall in consumer confidence and commercial enterprise trust. A resumption of credit market operations, signs of which we are just seeing, should help to stimulate a pickup in global trade. However, it will take some time for global trade to return to very active levels, suggesting that the


recovery will be sluggish. Our hope for a more robust economic recovery has to rely on growth in domestic consumption within the respective countries. The pace of economic activity around the world will dictate the growth, or lack thereof, for oil and gas demand. But we cannot forget the workings of depletion on helping to repair oil and gas pricing, especially as new petroleum industry capital spending slumps.


The bottom line is that we will experience the longest recession since the Great Depression. As we often remind ourselves, every recession is different from those that occurred before. The key is to try and understand how it is different and what those differences might mean for the pace of a recovery and, in turn, the health of the energy industry.

Parks Paton Hoepel & Brown
Reprinted with permission from PPH & B

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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Joe Wilson | Jan. 26, 2009
Pork barrel spending has to go. Pay cuts across the board for all of congress.

Ramadan | Jan. 26, 2009
I totally agree with Wayne, the real, mid & long term way out is 100% electrical generation using nuclear power. It has to have "Manhatton Project" federal priority and the "Right of Emminant Domain". Along the way we are simultaneously providing cheap electricty for urban vehicles. Fossil fuels are just too precious to squander making electricty and for driving up and down the interstate.Cut US fossil fuel demand and eliminate a large % of our emmissions.

Mike | Jan. 26, 2009
How is a trillion dollar stimulus and multitrillion dollar money creation deflationary? It's not!

Wayne Jeffers | Jan. 26, 2009
The US cannot stand an oil price increase as we have exported our mortgage dollars to OPEC as it is. We cannot stand to continue our trade deficit. We must invest in Nucular Power to lower our energy costs which will lubricate the whole economy.

Forrest Buxton | Jan. 26, 2009
It appears somewhat obvious that the more the government gets involved the longer the recession and the more likely a depression develops.

Anne Keller | Jan. 26, 2009
The rhetoric certainly doesn't help efforts to get us back on track. Just 6 months ago there was no recession in sight, and "this time would be different" than the last booms from the 1890s, 1920s, 1950s, etc. etc. etc. The saying that each generation forgets what happened before seems to be very true. And attempts to keep a downturn from happening just prolong the pain and spread it to people who shouldn't have to bear it, since they behaved prudently. The attempt to socialize the financial sectors attempts to keep propping up their stock prices with ever more amazing "products", and the governments acceptance of this idea is mind-boggling.


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