Oil Slick

Everyone is worried about deflation and recession now. But I’m looking across the valley.

When oil prices were over $140 a barrel and everyone was screaming “inflation,” why didn’t I worry? Because I was confident that the higher prices would bring on supply and that in a year or so we would be facing an oil glut. That’s what we saw in the ‘80s.

But now that oil is back under $70, I’m worried. Why? Because the combination of drastically lower prices and a credit crunch could interfere with this supply response. The result? Higher oil prices even if the economy weakens. That could lead to stagflation.

So what do we do? It still makes sense to strengthen the banks. They can make sure that oil servicers and other energy providers get the capital they need to keep the new supplies coming. Because lower energy prices are the one silver lining to the market’s pullback. If prices rise again, consumers and the market could be seriously hurt.

Douglas R. Tengdin, CFA
Chief Investment Officer
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