The price of oil and the recession

An article today in the New York times talks about the fact that the price of oil has been holding up remarkably well despite weakening demand and swelling inventories.  Oil Prices Resist the World’s Recession Trend (NY Times 2009-04-22).  The author credits the resiliance of the price of oil to OPEC supply cuts and people investing in oil futures as a hedge against the USD and inflation.

To me this dynamic risks worsening the global recession.  As one economist once said, a recession is a deflation trying to happen, i.e. when demand drops, but prices don't drop enough to keep pace, then a recession happens as people buy less.  As long as the price of oil is artificially propped up by hot money and OPEC the world will continue to consume less and less energy.  That doesn't sound so bad on it face. Isn't saving energy good?  But the energy will be saved because people are consuming fewer goods and services and because whole businesses will go under because high energy prices cause them to lose money.

The way I see this playing out is that either:
  • The price of oil will collapse in the near term, which will provide a stimulus to the economy which will help shorten the recession, or
  • The price of oil will continue to be propped up by speculators and OPEC, which will prolong and deepen the recession, which will in turn cause an even deeper collapse in the price of oil later.

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