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Behind the Low Oil Prices Lurks a Struggling Economy

By Jen Alic | Wed, 30 May 2012 22:05 | 4

As oil prices drop to below $90 a barrel this week, reaching a seven-month low, it’s fine to take heart in the accompanying dip in gas prices at the pump, but this is all relative in the larger picture of economic slowdown and possible recession. 

Last week closed with benchmark US crude at $90.86 per barrel and $106.83 per barrel for Brent crude, the lowest levels so far in 2012, and prices continued to fall this week, dropping to below $90 for the first time since the last quarter of 2011.

Weaker demand, stronger supply, signs of slowing US and Chinese economies and a temporary cessation of simmering tensions over Iran have worked to lower prices. The possibility, and indeed probability, of a recession across the European Union is likely to drive prices down further. Prices have also lowered as a result of the strengthening of the US dollar.

In the meantime, the Saudis continue to exert downward pressure on prices, not satisfied with the fact that oil has fallen by $15 a barrel over the past month alone. 

The trend is welcome at the pump in the US, where prices have fallen by 27 cents per gallon since early April. This, of course, ignores the drivers pushing oil prices down—drivers that some warn could lead to a recession in the US.

How much further can the price of oil fall, then? Talks in Baghdad on Iran’s nuclear program achieved what the key players had hoped for: the easing of pressure and the buying of time to stave off a geopolitical crisis and lower prices during an election campaign season in the US. Now the key drivers are indications of slowing demand and recession in Europe.

In the immediate future much will depend on what happens in the European Union, where a potential looming recession would further shrink demand for oil.  

Some experts predict that any sharp worsening of the economic situation in Europe will lead to a further drop in oil prices. Others believe that oil prices have hit their lowest, for now. According to Money Morning, oil prices aren’t expected to get much lower but will continue to climb, without any sharp spikes, in the longer term. “[C]urrent oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013.” 

If oil prices continue to fall, enjoy the lower gas prices for all that they are worth, because most experts agree this will indicate that recession is around the corner. After all, oil demand has always been a key indicator of economic growth. A booming economy demands more oil, a shrinking economy reduces its consumption.

Jeff Rubin, former chief economist for CIBC World Markets, told Canadian media that the danger of cheap oil is that it will mean much slower economic growth in the future, noting that “oil prices plunged to $40 a barrel in the last recession.”

The bottom line is that this is as good as it’s going to get, one way or another, and cheaper gas at the pumps doesn’t necessarily translate into good times. It’s all relative.

By. Jen Alic of Oilprice.com

Jen Alic is a geopolitical analyst, co-founder of ISA Intel in Sarajevo and Tel Aviv, and the former editor-in-chief of ISN Security Watch in Zurich.

About the author

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Jen Alic
Company: ISA Intel

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  • anonymous on May 31 2012 said:
    The best way to bring down the cost of oil and gas, is to use less of it.
  • Adnan Hussain Mustafa on May 31 2012 said:
    Drop in oil price is welcomed ,good news for consumers such drop lowers cost of production of both consumer and manufacturing, transport charges are more acceptable, air tickets should be lowered . The fall in oil price could be temporary related to some fear in the international markets of the future of the eurozone . I believe that the 128 dollars per barrel for Brent was a peak and now we should evaluate the decline, if it is over 20 per cent it is a sign of mild recession and if it settles around 20 per cent drop it is called correction.Finally i believe pushing prices up nowadays is difficult
  • Bob Smith on June 01 2012 said:
    Oil prices can not get any lower. If they drop so low, companies will lay off workers causing unemployment to sky rocklet. This would not help the economy get back on track.
  • A wondering person on June 03 2012 said:
    Is it time for Obama to pass the pipeline. And create some jobs. Whether you like it or not, jobs need to be created. How do stimulate an economy if you don't give the economy jobs. Is this so hard to figure out America- To spend money you have to make money first, an last time I checked Americans aren't making much money, So democrats. Wake up and smell the coffee, I have one question does obamacare create jobs, Does pipeline create jobs. Obama is too passive, he is not aggressive enough. If you wanna get re-elected go for energy. 80 dollars is the best price for oil. Everyone makes money.

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