Page 28 shows that China and India are relatively low consumers. The US uses 21 barrels of oil, 22 barrels of oil per person per year. China less than 3, India less than 2. There is no way China and India are staying there and that is where our marginal demand is going to come from. How quick we will see then and how much we will see is indeterminate but I think years from now, the price of oil won’t be where it is today. It will be because of emerging markets demand. That will be the case.
Why did the price of oil decline in the first place? Was it a plan by Saudi Arabia or Russia or someone else? I think not. I think it was a simple economic force as shown on Page 29. There you see that the price of oil has essentially tracked World GDP. World GDP has been declining because of the factors I cited earlier and the price of oil is going down with it. There is also some evidence that the amount of oil used per unit of GDP which used to be — there used to be a roughly 50% correlation, not it is closer to 25% so that has been an important factor. The worldwide demand is slowing and worldwide usage in relation to demand is slowing and that is why the price took a sharp drop. I am sorry I didn’t see this coming beforehand but in spending a lot of time trying to analyze the causes, this seems to be the best explanation I have been able to find.
Now if you worry about the US energy area, look at Page 30. The hydraulic fracking wells in both North Dakota and Eagle Ford, Texas range are all profitable above $50 so I think that you are going to see all of the hydraulic fracking producers continue production but what they will hold back on is new investment.
Now if you wonder why so many middle class people are complaining, go to Page 31. In this cycle, profit margins have reached an all-time high. They are down a little bit from the peak but they are still way up there in relation to earlier cycles. But unit labor costs have not increased at all so the average worker drawing a paycheck every two weeks in the plant or a restaurant or hotel, their earning haven’t increased. Their dollar earnings haven’t increased and their real earnings haven’t increased and they have actually declined. So this is the biggest problem and this is the heart of the inequality issue and I think this is going to be a very important topic in the 2016 election. So this chart shows why corporations have done well and that is related to individual stocks having performed. But it also shows that workers haven’t participated, so if you are an average person in the United States, the economy has recovered, the stock market has almost tripled, but you haven’t benefited and you are having trouble making ends meet. I think that is going to be a key political issue in the next Presidential election.
Then there are some other factors. If you look at 32, you can see that the number of people and the percentage of workforce in relation to population is down. We used to have about 74% of the population, of the 16 – 54-year-olds working and about 72% of the overall population. But the numbers are down. They are moving back up again but they don’t look like they are going to get to the previous levels anytime soon. So there is a dropout rate in the workforce. But happily, the most productive and in the highest spending component, the 16 – 54 year-olds, they are improving their position. So we hope that the household formations and a better housing market.
