Lower Gas Prices and the New Global Recession

How about these gas prices?  They’re incredible.  A recent AAA fuel gauge report marked the national average for a gallon of regular gas at just $2.03.

That’s down 38 percent from $3.28 a year ago.  At current prices it’s estimated the average household will save $750 on gas this year.  Not bad, for sure…

But the decline in gas prices is nothing.  Oil prices are down 55 percent over the last year.  This, no doubt, can be classified as an epic price collapse.  What’s going on?

The popular notion is that lower fuel prices will be a boon for the economy.  The consumer will take their additional savings and use it to buy additional consumer goods, goes the thinking.  More consumer spending will lead to a rise in gross domestic product.

This makes logical sense.  However, the magnitude and velocity of the oil price drop may be telegraphing that there’s more to the story.  Perhaps the global economy – including the U.S. economy – isn’t walking on as sound of footing as thought.

Global Recession Indicator

Here at the Economic Prism we posited several weeks ago that the price collapse had less to do with an abundance of new production.  But, rather, it was primarily driven by a slowing global economy.  In particular, the price correction was exacerbated less by production increases and more by demand decreases.

The following question was recently put to 306 investment professionals by ConvergEx Group.  “What oil price would show that a global recession was inevitable?”

“The idea behind this question was simple — at some point oil prices aren’t just a nice theoretical tailwind for global economies,” said Nicholas Colas, chief market strategist at ConvergEx Group.  “Rather, they become a signal that worldwide demand is contracting so quickly that oil prices must quickly decline to reflect that fact.”

The leading answer was $30 per barrel, which was provided by 26 percent of respondents.  About 16 percent of respondents said $35 per barrel would signal a global recession.  Overall, 62 percent of respondents said $30 or lower oil prices would be a good indicator a global recession was in the works.

Oil prices seem to be holding around $48 per barrel for now.  But if global economies are truly slowing, which we have reason to believe they are, then oil’s price could continue to decline.  Perhaps it may even fall to $30 a barrel…which is where it bottomed out on December 28, 2008, during the last oil price crash and Great Recession.

Lower Gas Prices and the New Global Recession

At the moment, the prospects for the global economy aren’t entirely clear.  It could grind its way higher.  Or it could fall back into recession.  What we do know is the oil and gas fracking boom towns are turning to ghost towns.

Take Crosby North Dakota, for instance.  Several months ago it was booming.  In fact, the City had spent $10 million to develop a 230 acre strip to accommodate the influx of oil field workers and secondary businesses.

“The year they proposed this they could have gotten quite a bit of commerce in there – but now?  It’s like a street to nowhere.  You’ve got streetlights on and nobody’s home,” says Cecile Krimm, editor of the county’s newspaper, The Journal.

“Emptiness along the newly built road is a portrait of the “echo economy” – an America that looks at plummeting oil prices not as a sign of savings at the pump, but as potential trouble ahead.  They are towns as remote as Crosby, where the recent oil boom drove rents to San Francisco levels, or as familiar as Houston, a metropolis bracing for as many as 75,000 layoffs.”

In a way, lower oil prices may have a double whammy effect.  Not only will they wreck the oil and gas sector.  They will also signal we’re entering a new global recession.

“We can’t just drill our way to lower gas prices,” said President Obama in March 2012.

Yet lower gas prices are here.  So if we didn’t drill our way here we must have arrived at lower gas prices some other way.  Over the next several months we should know more.  A new global recession may be the answer.

Sincerely,

MN Gordon
for Economic Prism

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