Monthly
Discussion
Oil Prices,
Energy Consumption, and the Stock Market
Several
times in past issues of this Newsletter we have seen the subjects of energy
consumption, oil prices, and the stock market come up one at a time. But as
these subjects are heating up again, it may be worthwhile to look at them again
all at once.
It was demonstrated in Predictions that
energy consumption in America, while steadily increasing, it has not been
following a steady growth rate but one that goes over peaks and valleys. We
specifically saw that this variation of American appetite for energy is
regularly periodic with a period of about 56 years. In fact, this so-called
Kondratieff cycle rocks many aspects of society besides the greed for energy.
In Exhibit 3 below I show the smooth periodic variation of energy consumption
without the actual data points for the sake of clarity. I have added blue and
orange points, the former signaling energy-price flare-ups and the latter
signaling stock-market crashes. As we saw in Predictions, both of these
phenomena resonate with Kondatieff’s cycle.
Exhibit
3. This graph is adapted from one
originally published in Predictions. It shows the percent deviation from the
S-shaped growth pattern that US energy consumption has been following for at
least a couple of centuries (see Predictions Chapter 8). Each peak
coincides with an economic boom while the each valley with a major recession or
depression.
The blue points show when energy
prices soared manifold. The orange points show when the stock market crashed.* Both phenomena here refer to serious cases. By that I mean
price flare-ups that lasted for at least a year and market crashes that did not
disappear without trace a few weeks later. Lesser phenomena, such as the
oil-price hike during the Gulf war and the market “crash” following September
11, are not visible in Exhibit 3 because the time scale consists of units of
one year and washes out short perturbations. These “lesser” events can be
interpreted as artifacts, i.e., consequences of singular happenings of
political or other accidental nature. The more important events pointed out in
Exhibit 3 have deeper roots because they follow a rhythm that resonates with a
natural-growth pattern.
Phenomena with deep roots are usually
linked to fundamental laws and consequently can be forecasted rather reliably.
However, trying to understand the theory behind it may be complicated. For
example, it is not surprising that high energy consumption coincides with economic
prosperity, and low energy consumption with recession/depression. But it is not
clear why boom and prosperity should eventually lead into skyrocketing energy
prices. Neither is it obvious that skyrocketing energy prices will cause a
stock-market crash 10-15 years later. As an experimental physicist, I will not
dwell on speculative theories. For me it suffices to have observed four cycles
of phenomena repeating regularly over two hundred years. I will put my money in
the fact that these patterns will continue repeating themselves, be it with
sometimes greater and other times lesser intensity.
Coming back to the news of nowadays,
we can confidently say that an oil price of $17 is a short-term downward
fluctuation, just as the price of $31 was an upward fluctuation a year ago.
Similarly, a market “crash” following an airplane crash is a fluctuation. Such
fluctuations will disappear leaving no trace. How soon? Within weeks, possibly
a month or two, but in any case, much less than a year. Why do I feel confident
that this is the case? Because of where we are on the cycle. Exhibit 3
indicates that ahead of us lie years or “normal” evolution. That is, no real
market crashes, no real oil-price hikes (or dips). You can count on any
fluctuations to go away sooner rather than later.
But the reader should not interpret
all this as an overly optimistic message. We still have some way to go before
the next boom. And the stock market is far from charging on in a steadily
bullish fashion (see Exhibit 1). Personally I am simply content with the
conclusion that there are no bad surprises up ahead, and that even if some show
up, they will be of the “reversible” kind, so I’ll know how to react.