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.


* The stock-market crashes of 1816 and 1873 refer to European stock markets because the DOW did not play a major role at the time.