Oil at $100 a barrel changed global economy

“Oil is falling, oil is falling!” So what? Oh, it’s true enough by and of itself. Over the past few trading sessions, we have indeed seen crude oil futures fall some $11 off the all-time high of $135.09 a barrel set a fortnight back.

It’s almost comical how the all the Wall Street analysts and their talking-head stooges are tripping over each other to point out this new record low. Why, this is the lowest price since May 15!

Don’t Celebrate Just Yet… But don’t break out that bottle of cold duck you’ve had stashed in the back of the company fridge just yet. Because in this case, “down” is definitely a relative concept. And the reasons for even this modest drop may be nothing to cheer about.

Two years back, if a pundit wanted to throw out a real bomb, he or she would predict $100 oil. Everyone would gasp at the sheer audacity or mere stupidity of such a claim. Didn’t they know that the price supply and price demand curves would prevent that from ever happening?

You see, there are several things that are supposed to happen when oil prices climb. First of all, the supply of oil magically increases.

In reality, it isn’t quite that simple. Much trumpeted “alternative” oil sources aren’t quite as magical as commonly assumed. Different crude oil sources have radically different prices associated with extracting them and making use of them.

When a fresh field is so ripe that the oil simply oozes up out of the ground, the cost to deliver to market is pretty darned cheap. Work that field’s reserves down for 20 years or so, and now you must (at great cost) pump in water and steam in order to get half of what you used to scoop up with a child’s sand bucket. And when those easy to find reserves are clapped out, you must look farther and farther afield to find ever more expensive fresh supplies.

Modern geophysical science can guide us to more raw oil then ever before. So after a fashion, the supply appears theoretically elastic (at least within our lifetimes). Marginal crude that would have been unprofitable to fetch out when the cost of crude was a mere $50 a barrel, becomes intriguing at $65 and damned attractive at $75.

But even this curve has its limits. Much of this more expensive oil is still quite theoretical in nature. It is stuck in as yet unmined and perhaps unprocessable Canadian oil shale. It may or may or not exist in as yet undrilled deep wells miles off the coast of Brazil. It bears huge input costs in terms of limited resources like water, electricity, and natural gas.

And now let’s introduce another new factor or two... Or rather, a few billion new factors.

I’m referring, of course, to the newly minted middle class in China, Brazil, India and Russia who aspire to heated, lit homes complete with a car or two in each garage.

And these masses don’t wish to wait. They want the good life now! This brings us to the second limiting curve: price vs. demand.

The sudden increase in global demand has doubled oil prices nearly three times over the past decade.

During much of that time, the U.S. and global economies were enjoying the benefits of two bubbles -- first the final blow off the top of the Internet, and then after a fierce but relatively short collapse (22 months, really!), another five years of the real estate rocket-ship ride.

But now we may finally be seeing crude oil’s price limiting both this economic success -- and its own continued unceasing price increases.

The Organization for Economic Cooperation and Development has just cut its economic growth outlook through next year. It now forecasts several quarters of weak growth for most of its 30 members, which include the U.S., Japan, and several European countries.

Their reason? High oil prices.

Even that ultimate optimist (read: “paid shill”) Federal Reserve Chairman Ben Bernanke has announced that crude-oil-driven inflation is now a prominent concern. (He makes no mention of any role he may have played in that inflation, but hey, we’ve got laws against self-incrimination.)

However, this downturn appears to have finally put a damper on oil’s headlong rush.

A recent MasterCard SpendingPulse survey noted that demand for U.S. gasoline demand fell 4.7% last week compared to the same week last year.

Add in the fact that this reported period included the long Memorial Day holiday weekend this year, and you have an impressive falloff.

This survey’s results jibe with recent data from the Energy Department and Federal Highway Administration, which indicate that high prices are cutting finally into Americans’ demand.

United Airlines has announced another 1,100 pink slips, and is mothballing 100 of its older fuel-thirsty MD-80s. General Motors has alerted all who still care that it intends to close four truck and SUV plants in the U.S., Canada and Mexico. What’s more, it may dispose of the once precious Hummer line of road monsters.

Nor does this trend does not end at the U.S. border: India has is boosting gasoline prices in New Delhi, by 11%. And Malaysia intends to hike gasoline prices by 40% and commercial and industrialBut again, so what! A hundred-dollar barrel of oil is still a massive paradigm changer.

At $100 a barrel, commuting on overcrowded highways through the great sprawling American suburb is still untenable, indicating further reductions in overpriced single-family housing. Don’t be surprised if an entire class of once-and-future renters simply walk away from “their” heaps and return to inner city apartment life.

At $100 a barrel, pick-up trucks and SUVs, too, are being abandoned by the roadside. Detroit simply has to find a way to make a profit selling smaller cars, or it will vanish from the industrial landscape.

Airlines Will Be Stuck at the Gate

At $100 a barrel, U.S. airlines cannot afford to own enough planes to fly you across the country in a single day. Fleet sell-offs will become the norm, which will lead to huge delays and spikes in discounted passenger bumping. Think $15 for every bag is outrageous? Plans are currently being floated to add surcharges for all bodyweight over 100 lbs.

At $100 a barrel, next day delivery of goods becomes impossibly expensive. The entire concept of just-in-time inventories becomes completely unfeasible. As I sit to write, truckers around the first world are pulling over because they simply cannot afford to drive anymore.

In fact, at $100 a barrel, the idea of shipping goods around the planet so as to avoid local labor costs doesn’t sound so attractive anymore. Indeed, all manufactured goods will simply cost folks more. But Americans may actually be able to make a living making quality stuff again.

There are other potential winners here. First of all, there are the old rail carriers. For years, we in the U.S. have abandoned our rail lines to rot. Now, suddenly, rail’s massive cost advantage renders it an extremely attractive means of shipping.

No shock, then, that Warren Buffett, an old fan of elegance if ever there was one, aspires to be a new rail baron.

It should also be no shock that I have advised readers of my regular weekly column to short truckers like United Parcel Service (UPS) and Con-Way (CNW).

Heck, if United Airlines can’t get me to Los Angeles in a day anymore, I may very well take the train next time I have to lug the family coast to coast. Could the return of elegant Pullman cars be in the offing? Indeed, could this whole “grand slowing down” be leading to a return to elegant solutions in general?

I’ll have more on the New Elegance’s big winners and losers next week, including some specific picks, and a major warning as well.

So oil may have stopped gaining. Heck, it might even retreat a bit. Maybe by this time next week, we will be talking $110 oil. Perhaps in a month it will plateau at $100 a barrel.