Hurray Lower Gas Prices. Oh Darn, Lower Gas Prices
Welcome to the Real Estate Espresso podcast. Your morning shot at what’s new in the world of real estate investing. I’m your host Victor Menasce. Back in the 1970s, there was a very popular graphic of a U.S. Lincoln one-cent coin. The original coin on the back has the words engraved, in god we trust. The coin has been altered to say, in oil we trust. At the time, that meme rang true as people were lining up at gas stations around the block and oil prices spiked. The economic turmoil of these days was the result of the opaque oil embargo.
Global trade was disrupted and a new word was coined. Economists had their rule book broken and were seeing simultaneous price inflation and economic contraction. The term stagflation was born and remains as a textbook condition, which can happen whenever there’s an artificial constraint on economic activity.
With all the talk of tariffs and how prices for iPhones are going to jump, and how the demand for products from Apple and Amazon are going to take a massive hit, few people are paying attention to the other major levers in the economy. It’s as if people are only looking at one side of the coin, or half of the equation.
China today imposed a retaliatory 34% duty on all goods coming from the US into China. So, if the gorilla glass used in the iPhone is coming from the Corning facility in Kentucky, that glass will be subject to a 34% tariff. But, if the glass is from the Corning facility in Taiwan, then the glass will probably enter the Foxconn manufacturing facility in China duty-free.
The prospect of tariffs is going to inject a level of uncertainty into the economy. There is no question about that. Now, on Thursday, one day after President Trump’s liberation day, OpExPlus came out with their production targets for the next few months. Timing is coincidental, but it appears the president is going to get his wish for lower oil prices. Oil prices have dropped 10% in two days.
The public narrative is that the Saudis are frustrated with Iraq and Kazakhstan for exceeding their quotas and selling more oil on the open market than permitted under the OpEx quota. The increase in production is designed to teach Iraq and Kazakhstan a lesson. The drop in global oil prices is driven, of course, by the increase in supply along with the anticipated drop in global demand.
The increase in production was really a compression of three months of increase into a single month. The economic slowdown was already underway, and it’s further being amplified by the tariff uncertainty. The last major global trade war was in the 1930s. Even if you weren’t around in those days, the protectionism that took hold in the 1930s is blamed for a 60% drop in global trade almost overnight and a prolonged extension of the Great Depression.
There were several factors that pulled the U.S. out of the Great Depression, some point to President Roosevelt’s New Deal, providing stimulus in the infrastructure projects and the economy. Most certainly it played a role. But most historians credit the Second World War as providing the demand for economic output, which ultimately brought an end to the Great Depression.
Our world today is very different than it was in 1933. We’ve got much more global trade than we did back then, and supply chains are much more interconnected. Protectionism is much less likely to change behavior, I can say this categorically. I’m not worried about sourcing something from China. I’ll find another country if I need that product at a competitive price. Even if factories are built in the US, they’re going to be highly automated facilities, and that’s not going to do much to create jobs in the US.
So now, with the specter of reciprocal tariffs, economic slowdown, and falling gas prices, some people are cheering because it will cost less to fill the tank in their car. But if you’re a shale oil producer, you’re probably having a flashback to 2014 when OPEC killed the US shale industry by dropping oil prices below the economic break-even for oil production.
I believe that the spike in oil production at the time of declining demand is a deliberate move to crash prices and crater the US oil industry, so it’s not just an action aimed at Iraq. This is one of those times when it’s hard to make sense out of what’s happening in global markets, and quite frankly, some of it makes no sense at all.
The US is one of the most sought after markets in the world when it comes to access to markets. Countries specialize in certain products and commodities. So, who exactly benefits from a 10% reciprocal tariff? I’m struggling to see the winner in this equation. Some of the other tariffs make no sense at all. I mean, think about it. Botswana was hit with a 37% duty on all of its exports to the US.
This signifies a major trade imbalance between Botswana and the US. We’re talking about one of the poorest countries in Africa being hit with a tariff that’s higher than China. What is the major export from Botswana to the US? Botswana is just north of South Africa and it produces diamonds just like South Africa does. You’re not about to relocate a diamond mine from Botswana to the US.
So for now, the US is saying, “Hooray, lower oil prices are coming!” But soon, they’ll be saying, “Oh darn, oil prices have fallen and that’s killed the shale industry.” As you think about these issues, have an awesome rest of your day, go make some great things happen and I’ll talk to you again tomorrow.
Stay connected and discover more about my work in real estate. Visit and follow me on various platforms:
Real Estate Espresso Podcast:
- 🎧 Spotify: The Real Estate Espresso Podcast
- 🌐 Website: www.victorjm.com
- 💼 LinkedIn: Victor Menasce
- 📺 YouTube: The Real Estate Espresso Podcast
- 📘 Facebook: www.facebook.com/realestateespresso
- 📧 Email: [email protected]
Y Street Capital:
- 🌐 Website: www.ystreetcapital.com
- 📘 Facebook: www.facebook.com/YStreetCapital
- 📸 Instagram: @ystreetcapital
