The False Economies Of Falling Oil And Commodities Prices

The cost of a barrel of crude has fallen from $147 this summer to $95. On the abacus that is a drop of 36%. Gas is not down nearly that much and still sells for nearly $4 a gallon in some cities.

The prices of key agricultural commodities are also down by about a third and this has done severe damage to stocks in seed-makers and agricultural-chemical producers. But, the falling prices are not making it to many consumers.

Retailers are not passing their lower cost on to customers. They view the lower prices as an opportunity to make money.

Food stores and gas stations believe that the rise in commodities prices was not their fault. There is some logic to that which almost certainly makes it right. They did not create demand. They simply served it.

These businesses have suffered for over a year. Their margins have been destroyed because they could not pass their costs on to consumers without undermining the volume at which people bought their products.

Now, the food and gas industries have a chance for revenge and they are going to take it. That means the assumption that inflation will fall during a recession may not be true at all.

Profits are hard to come by in a sharp economic downturn. That is especially vexing to businesses which could not make money during the prosperous times. A second year of poor income could sink the supermarket business. The gross margins in the industry have always run in the low single digits. The retail gas industry has become so awful that large oil companies like Exxon (XOM) have dumped their petrol stations and put all of their resources into exploration and refining.

If the weather across the Northern Hemisphere is cold this year, heating oil companies will also prey on customers to keep their profits as robust as possible.

Commodities prices may be falling, but to the consumer, it will not matter one iota. Even with their incomes under pressure, the markets for the things they need most are going to harm them further.

Douglas A. McIntyre