It has taken only 12 days into the new year for a major prognostication to take shape in the global economy as the price of oil fell below $30 per barrel in intra-day trading.
Leading up to the beginning of 2016, several analysts on both sides of the spectrum (mainstream and alternative) forecasted troubling times for the economy should oil move down into the $20’s for an extended period of time.
If oil prices take another dramatic slide, as I believe they will, who wins and who loses? And could plummeting oil prices sow the seeds of the next recession?
Oil-importing countries are obvious winners from falling crude prices. That includes the U.S., where — despite a surge in domestic production — imports still account for nearly 50 percent of petroleum consumption. The net oil-importing countries of western Europe and Asia also benefit from falling crude prices. India and Egypt, which subsidize domestic energy use, will surely benefit. Some of that, however, will be offset because crude oil is priced in U.S. dollars, and those countries’ currencies have grown weaker against the greenback.
Lower oil prices, however, could come with a downside. As they work their way through the system, deflation could follow. Already, 10 of the 34 largest economies in the world have seen year-over-year declines in consumer prices. The risk is that deflationary expectations could follow, encouraging consumers to withhold purchases in anticipation of even lower prices. – Bloomberg
While oil prices bounced off $30 following their drop into the $20’s, the Rubicon has been crossed, and we will see in the coming weeks if prices overall can stabilize, or follow a new prediction out this morning that is suggesting oil may not go as low as just $20 per barrel, but perhaps even $10.
Kenneth Schortgen Jr is a writer for Secretsofthefed.com, Examiner.com, Roguemoney.net, and To the Death Media, and hosts the popular web blog, The Daily Economist. Ken can also be heard Wednesday afternoons giving an weekly economic report on the Angel Clark radio show.