See, OPEC: Janet Yellen knows how to do a freeze. Or, rather, a very slow thaw.
The Federal Reserve Chair’s reassurance of a gradual approachto raising interest rates helped revive an oil market losing its fascination with OPEC’s chatter. (Good job, too, what with Saudi Arabia and Kuwait announcing on the same day they would actually restart a field shut down in 2014. Clearly, the supply freeze is a complicated affair.)
So, too, though, is the Fed’s relationship with oil. And if you want to see how frozen, low rates can wreak havoc, cast your mind back to the housing crisis.
In several recent reports, energy economist Phil Verleger has laid out the unsettling similarities between the U. S. residential construction bubble and the later surge in oil and gas drilling investment.
We’ll still be arguing decades from now about exactly why we collectively went crazy for Floridian sub-divisions and the like, but cheap and plentiful credit was clearly a big factor.
The same goes for the oil and gas boom.
Just as the housing bubble relied on faith in U. S. house prices only going up, so investors’ willingness to buy the energy sector’s bonds (and stocks) rested on a couple of intoxicating assumptions: OPEC would backstop prices and China would never falter (so, about that…)
This post was published at David Stockmans Contra Corner on April 4, 2016.
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