Mostly forgotten as the financial markets have melted down over the past two months is the impact of record high oil prices on the global economy. The EIA announced today a domestic crude stock increase of 8.1 million barrels today to near 303 million barrels last week. That was more than 8 times the expectations of investors and indicative of the "off the cliff" plummet our economy took in the last few weeks.
Oil prices are now back to levels seen around this time last year however gas prices are still 70 to 80 cents higher than last October. That effectively is an additional tax on citizens that prevents expenditures elsewhere. In light of the current situation on Wall Street and with current earnings reports coming in showing a precipitous fall in retail activity at the end of last month every dollar counts. The issues on Wall Street are running cover for big oil, without the minute by minute coverage of Wall Street someone may actually ask why we are still paying so much for gas when demand has collapsed and prices of oil are back to where they were when we were paying $2.70 a gallon. More to come on this situation as the gap between past oil prices/fuel prices and the current spread are detailed.
CBS News ran a provocative story Sunday detailing the "shadow" market that is the CDS or credit default swaps. Some estimates put the value of this market at nearly a quadrillion dollars which would explain how a few million foreclosures on an average home value of $200,000 has turned into a multi-trillion dollar bailout. The subprime crisis is being blamed on homeowners not paying their bills when in reality the rampant gambling on the derivative products is to blame. Check out the story on CBS News. Essentially mortgages were packaged up into mortgage instruments and or derivatives. Insurance was then sold on these products but it is not called insurance because that term would require regulation. Instead the term "swap" was used. When these assets turned bad the swaps were triggered but unlike traditional insurance that is regulated companies like AIG were not required to maintain capital to cover losses and as a result became illiquid. Why should we be concerned? Because they have done the same thing with other forms of debt including credit cards which could trigger a new crisis in the coming months as credit card defaults continue to skyrocket.
