Cheap oil is not responsible for recessions

Anatole Kaletsky:
The predictive significance of oil prices is indeed impressive, but only as a contrary indicator: Falling oil prices have never correctly predicted an economic downturn. On all recent occasions when the price of oil was halved – 1982-1983, 1985-1986, 1992-1993, 1997-1998, and 2001-2002 – faster global growth followed.

Conversely, every global recession in the past 50 years has been preceded by a sharp increase in oil prices. Most recently, the price of oil almost tripled, from $50 to $140, in the year leading up to the 2008 crash; it then plunged to $40 in the six months immediately before the economic recovery that started in April 2009.

An important corollary for commodity-producing developing countries is that industrial metal prices, which really are leading indicators of economic activity, may well increase after an oil-price collapse. In 1986-87, for example, metal prices doubled a year after oil prices fell by half.

A powerful economic mechanism underlies the inverse correlation between oil prices and global growth. Because the world burns 34 billion barrels of oil every year, a $10 fall in the price of oil shifts $340 billion from oil producers to consumers. Thus, the $60 price decline since last August will redistribute more than $2 trillion annually to oil consumers, providing a bigger income boost than the combined US and Chinese fiscal stimulus in 2009.
The savings result in more consumer spending on other items which give sa boost to the economy.  While some have argued that decreased demand from China is the cost for the price drop, I don't think so.  As the price began to drop China started buying oil and hording it on tankers assuming the price would go back up.  It has not mainly because the supply of oil has actually increased since the prices began to drop, despite some cutbacks in drilling.


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