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Gasoline-Price Drop Isn't Good News When You've Got Nowhere to Go

Gasoline-Price Drop Isn't Good News When You've Got Nowhere to Go
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By Monday, 20 April 2020 10:45 AM Current | Bio | Archive

Global oil prices have now fallen to levels not seen since 1999 on, among other things, concerns that U.S. crude storage will soon be full while companies prepare to report the worst quarterly earnings since the financial crisis, Reuters reported.

Now, ordinarily, a lower oil price is simply a transfer of wealth from oil producers to oil consumers. Normally, this supports the economy of oil consumers as it means that real incomes will rise.

However, that may not be so powerful a force today. The reason the oil price is low is of course that the world is in “lockdown” and consumption of oil has collapsed. This means that for many consumers the price of oil is effectively “zero” as they are not buying oil. There is no point putting petrol or gasoline in your car if you are not travelling anywhere. In that situation, oil is contributing zero to the actual cost of living, though it still does contribute to consumer price inflation.

The lower oil price also raises serious concerns about the “debt” of oil producers, be they countries or companies.

However, oil is still being used and to the extent it is part of the production process, and therefore, the lower oil price may offer some improvement to profit margins in other sectors.

On Sunday, the Trump Administration has temporary postponed some tariffs on American businesses by delaying certain trade tariffs by up to 90 days. Steel and aluminum consumers in the United States still have to suffer under the burden of tariffs but other companies are being relieved.

U.S. importers seeking a tariff-payment delay must demonstrate a significant financial hardship and have operations that are fully or partially suspended during March or April 2020 due to orders from a competent governmental authority limiting commerce, travel, or group meetings.

President Trump’s special tariffs on Chinese goods and steel and aluminum imports are not included in the tariff-deferral offering, the Wall Street Journal reported.

However, there was also a clear admission that U.S. trade tariffs hurt American companies. Treasury Secretary Mnuchin stated on Sunday “by postponing the deadline to deposit certain duties, taxes and fees for 90 days, we are providing much needed relief to affected businesses. This will protect American jobs and help these businesses get through this time,” the Financial Times reported.

This may make it harder to spin trade tariffs as being something that foreigners pay.

There is also the practical point that is when you are in lockdown, paying trade tariffs may be more difficult to do because a trade tariff isn’t a regular tax and systems are unlikely to be automated requiring people to be at work in order to pay the tariffs.

Besides all that, the Irish Times reports that the European Central Bank (ECB) is having early stage discussions to set up a Euro area “bad” bank, which is of course an important subject for investors who have or intend to have or use euro related investment instruments. The bad bank they are talking about at the ECB would remove billions of euros in toxic debts from lenders’ balance sheets.

The issue is not the solvency of the European Banking system, but the ability of European banks to lend when Phase 2, which is the so-called economic bounce back, gets underway.

Apparently, the discussions are not going so well.

Meanwhile, Italian Prime Minister Conte has been calling, again, for “joint” debt issuance in Europe, ahead of a virtual EU summit this Thursday, April 23. The proposal appears to be about funding “new” initiatives through joint debt and not about showing the burden of “existing” EU government debt.

Besides all that, today in Germany, smaller stores are “reopening” after the lockdown. How consumers will react as they emerge from the lockdown is going to be important. Already, there are a lot of heated debates on the subject going on, Reuters reported.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Global oil prices have now fallen to levels not seen since 1999 on, among other things, concerns that U.S. crude storage will soon be full while companies prepare to report the worst quarterly earnings since the financial crisis
gasoline, oil, price, drop, virus
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2020-45-20
Monday, 20 April 2020 10:45 AM
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