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. Charles Kennedy for Oilprice.com