.png)
What’s been going on in oil has really been counterintuitive and has defied the predictions of most analysts.
You see, oil was supposed to act like a huge tax cut for consumers, fueling spending and growth. In reality, it’s not a tax cut. Instead, it’s a transfer of wealth from oil producers to oil consumers.
So far, energy producers have slashed spending and fired employees, without a corresponding pick up in spending by consumers.
While I must admit that filling up for less than $2 per gallon is satisfying, we’ve witnessed economic pain without economic gain. And it’s spilled over into the broader stock market.
Furthermore, the steep decline in energy earnings has pulled down profits for the overall S&P 500 Index and wreaked havoc on high-yield bonds.
That’s why the recent recovery in oil has aided stocks. As we head into late spring and summer, we are entering what has traditionally been a strong period for oil (St. Louis Federal Reserve, Energy Information Administration).
Yet the recovery in oil is fragile. While the steep drop in prices since 2014 is starting to impact production from the more costly U.S. shale fields, oil output has been far more resilient than many had anticipated – credit innovations and efficiencies gained over the last year.
But talk of a deal to freeze or cut production among key global producers remains just that – talk.
