The coming crash and what it portends

If we continue on the present course, we will enter a depression that might make the 1930s a distant competitor. The number of jobless Americans could reach tens of millions.

WSJ: Rethinking the Coronavirus Shutdown:

Yet the costs of this national shutdown are growing by the hour, and we don’t mean federal spending. We mean a tsunami of economic destruction that will cause tens of millions to lose their jobs as commerce and production simply cease. Many large companies can withstand a few weeks without revenue but that isn’t true of millions of small and mid-sized firms. ...

The deadweight loss in production will be profound and take years to rebuild. In a normal recession the U.S. loses about 5% of national output over the course of a year or so. In this case we may lose that much, or twice as much, in a month.

Our friend Ed Hyman, the Wall Street economist, on Thursday adjusted his estimate for the second quarter to an annual rate loss in GDP of minus-20%. Treasury Secretary Steven Mnuchin’s assertion on Fox Business Thursday that the economy will power through all this is happy talk if this continues for much longer.

This is the first time ever that the US Government has deliberately shut the economy down, and the idea that it can just be turned back on like flipping a switch is delusional.

Consider: We will never be able to determine how many lives were saved from the virus. But we will easily know how many people died because of the economic crash to come - just count increased suicides and even some homicides, to say nothing of untold numbers of people thrown into permanent poverty.

The lockdowns and stay-at-home orders are saving lives now. But if they continue much longer, they will cost lives later and cause economic, literal suffering for years and years to come.

Also, The Atlantic, "Suicide and the Economy."

On April 12, 1937, the express train to New York roared across the New Jersey countryside. The train, a Pennsy Railroad electric locomotive the color of bull’s blood, usually passed through the station at Elizabeth at about 50 miles per hour. On this particular morning, it came to an unanticipated stop. As the express rounded the curve, my great-grandfather jumped down from the platform, where witnesses reported he had been pacing for 10 minutes, and lay down across the tracks.

When the engineer was finally able to halt the train 100 feet past the platform, Roy Humphrey had disappeared beneath its wheels. His last act: raising his head to look at the oncoming train.

Roy was one of at least 40,000 Americans who took their own lives that year and the next, the two-year span that suicide rate spiked to its highest recorded level ever: more than 150 per 1 million annually. 

Related: Why we cannot afford 99-cent gasoline.

Update:

"US unemployment could surge to 30% next quarter and GDP might plunge 50%, Fed's Bullard warns"

Also relevant: "The luxury of apocalypticism -- The elites want us to panic about Covid-19 – we must absolutely refuse to do so."

The point is, there is such a thing as doing too little and also such a thing as doing too much. Doing too little against Covid-19 would be perverse and nihilistic. Society ought to devote a huge amount of resources, even if they must be commandeered from the private sector, to the protection of human life. But doing too much, or acting under the pressure to act rather than under the aim of coherently fighting disease and protecting people’s livelihoods, is potentially destructive, too. People need jobs, security, meaning, connection. They need a sense of worth, a sense of social solidarity, a sense of belonging. To threaten those things as part of a performative ‘war’ against what ought to be treated as a health challenge rather than as an End Times event would be self-defeating and utterly antithetical to the broader aim of protecting our societies from this novel new threat. To decimate the stuff of human life in the name of saving human life is a questionable moral approach.

And why cheap gasoline is unaffordable.

Cheap gas, nowhere to drive, and the real pain it is causing

If you like the very low gasoline prices, even though we are not supposed to drive anywhere, get used to it. Oil's spot price may drop some more, yes (it plummeted today after Thursday's highest-rate increase ever in one day). But production is going to drop. Usually, that means gas prices rise. Not this time. And that is actually very bad news.

Cheap gas and nowhere to go. That's bad.

American oil frackers operate at a loss much below $60 per barrel (depending where they are located). The largest such operation, the Permian Basin, needs about $65 per barrel to make a profit. It straddles Texas and New Mexico.

The drop in oil price was triggered by Russia's refusal to cut production at the Saudis' request. So the Saudis jacked production up to drive the price down and punish the Russians. Well, good luck with that:

After oil prices collapsed in the worst drop in nearly three decades—courtesy of the renewed Saudi-Russia rivalry on the oil market – Russia’s Finance Ministry said on Monday that Moscow had enough resources to cover budget shortfalls amid oil prices at $25-30 a barrel for six to ten years.  

Not coincidentally, both the Saudis and the Russians would like to see America's frackers permanently closed and the United States to return to a major importer of oil, not net exporters as we are right now.

One way or another oil prices will rise - eventually. That seems a cloud but actually it is the silver lining. The cloud is cheap oil. Active-rig counts fell this week in the US by 160, year over year, to 722. On the other hand, US oil production remains near an all-time high at 13.1 million barrels per day. Go figure.

And next month may be even more dramatic.

Analysts say that the month of April could see the largest supply overhang in the history of the oil market.

“We now expect the y/y demand loss to peak in April at 10.4 million barrels per day (mb/d), and annual demand to fall by a record 3.39mb/d in 2020,” Standard Chartered wrote in a note.

In the short run, the oil market surplus could reach a peak of 13.7 mb/d in April, Standard Chartered said, with an average surplus of 12.9 mb/d for the second quarter. The inventory buildup could reach a gargantuan 2.1 billion barrels by the end of the year, “stretching the midstream of the industry to its limits,” the bank wrote. That figure represents an upward revision of 50 percent from the 1.4-billion-barrel inventory surplus the bank predicted…just a week ago.

Other analysts have even more dramatic scenarios. Eurasia Group says demand could fall by as much as 25 mb/d in the next few weeks and months. The historic glut means that the world could run out of storage space. “The combination of weakening demand and excess supply is hardly going to be accommodated by onshore storage,” Giovanni Serio, head of analysis at Vitol, told the FT. “At a certain point…we will need to fill all the boats.”

 So severe is the situation that for practically the first time in long memory, "Texas Weighs Curtailing Oil Production for First Time in Decades."

Texas regulators are considering curtailing oil production in America’s largest oil-producing state, something they haven’t done in decades, people familiar with the matter said.

Several oil executives have reached out to members of the Texas Railroad Commission, which regulates the industry, requesting relief following an oil-price crash, the people said. U.S. benchmark oil closed around $25 a barrel Thursday.

Texas, which hasn’t limited production since the 1970s, was a model for the Organization of the Petroleum Exporting Countries, which has sought to control world-wide oil prices in recent decades. OPEC and Russia were unable to reach a deal on reducing output in response to the coronavirus pandemic, which helped trigger the current collapse in prices.

It is unclear whether regulators will ultimately act to curtail production, but staffers are examining what would be required in such an event, the people said.

Oil prices have always been manipulated by producers. Even so, at the end of the day, demand has always been in control. And now the worldwide demand has dropped like an anvil and will continue to do so. The largest users of petro products - shipping and aviation - are harboring vessels and canceling flights. That will likely accelerate.

That said, oil production is going to plummet because, as stated above, we are running out of places to put it. That does not mean that gas prices will suddenly rise. The huge over-supply will see to that. But cheap gas prices are not going to offset the real pain dropping demand will cause: higher unemployment not only of oil-industry workers, but businesses whose revenues depend on customers using oil just to buy or get to their products or locations, such as hotels, tourist attractions, airline workers, dock workers, gas station owners and workers, the list is very long.

I am not an economist by a long shot, but unless we stop our "insane over-reaction," there is going to be a lot of pain to come that 99-cent gasoline will not pay for.

Update: How low can it go? "How Low Can Oil Go? One Forecast Sees $5 a Barrel." Which means that gasoline will be not much higher than free - and yet it will be also more difficult to find because gas stations will be closing at accelerated rates as oil prices plummet.