The Significance of Sharply Lower Oil Prices

The price of oil delivered in May went negative on the last day of trading in this contract. The reason for this is that the contracts require holders to take delivery, and with nowhere to store the oil, traders were desperate to get out of their positions. While this is generally well understood, the full significance is not.

Many see the sharply lower oil prices as a mere curiosity. Others draw the conclusion that all things will be cheaper because low oil prices will translate into lower costs of production. Few, if any, make the observation that this will translate into sharply higher prices for consumer goods, and sharply lower prices for the means of production. Hardly anyone is worried about hyper-stagflation, but that's where we're going.

Oil prices are not lower due to increased efficiencies. They are lower due to disruptions in the supply chain. Consumer goods are no longer being produced in quantities anywhere near what they used to. This is what's driving the price of oil down. It's also what's going to drive the price of consumer goods higher, because there will be shortages. The bizarre situation will arise where companies and farmers go bankrupt at the very same time that the cost of consumer goods skyrocket.

By Wilfredor - Own work, CC0, Link