Helping America Navigate a New Energy Reality

Why the falling oil price may not lead to boom

By on 17 Jan 2016 in analysis, notable posts

A container ship passes through Singapore harbour

(Guardian) There was a time when Blue Monday meant a song by New Order. These days it is the third Monday in January, allegedly the most depressing day of the year.

Whether there is any scientific basis for this claim is debatable, but for what it’s worth the argument is that people feel miserable because Christmas is over, the credit card bills are arriving, it’s dark when you go to work in the morning and it’s dark when you head home.

This year, there has been an additional reason to feel down in the dumps: it is more than 80 years since financial markets have had such a miserable start to the year . The gloomy mood was summed up by RBS, which advised clients to sell everything apart from high-grade bonds .

The markets are haunted by the fear of recession. That hardly bears thinking about given that the repair job from the biggest slump of the postwar age is far from complete. The net sum of seven years of unprecedented stimulus provided by zero interest rates and quantitative easing would be a half-baked recovery, a widening of the gap between rich and poor, emerging markets in crisis, and developed countries deep in deflation.

All of which explains why policymakers are hoping that the bears are wrong and that the markets are making a fuss about nothing. Indeed, the dumping of shares and the collapse in the oil price below $30 a barrel will quickly be forgotten if the global economy continues to expand at its current modest pace.

The idea that a falling oil price might be a problem seems intuitively wrong. Since the early 1970s there has been a simple equation: sharply rising oil price equals global recession. That held true in 1973-74, 1979-80, 1990 and 2008. Meanwhile, periods when the oil price has been falling – the mid-1980s and the second half of the 1990s – have been associated with booms.

Comments are closed.

Top