Economy: There Is No Such Thing As An Oilmageddon

(Drivebycuriosity) - It`s the season of the scaremongers. The economists of the Citigroup claim that collapsing oil prices will draw the world into a "death spiral" (bloomberg). According to them the losses of the oil producer countries will reduce the global demand for goods & services and cause a worldwide depression, they call this gloomy scenario the "Oilmageddon". Ridiculous!

1. In the years 2007/08 we experienced exactly the opposite movement. Then the oil price spiraled from $53 to $147. If an oil collapse is bad for the global economy, then an oil price spike must be good? Did the sudden oil price rise boost the global economy in 2008? Did the oil producer countries, who made gigantic gains, buy more goods from the US & Europe ? Did the banks, who finance oil production & exploration prosper and make huge profits? Nope. Instead the global economy crashed. A study by Prof. James Hamilton (University of California, San Diego) shows that this oil price shock turned the economic slowdown into a severe recession (econbrowser).: "The oil price increase over 2007:H2-2008:H1 should be regarded as a key development that turned the slowdown in growth into a recession" (archives). Other researchers came to the same results: In 2003, the average suburban household spent $1,422 a year on gasoline, which rose to $3,196 in 2008 (oilprice). "Rising household energy prices constrained household budgets and increased mortgage delinquency rates" (oilprice).


2. The year 1986 had a similar oil collapse like today. Then a sudden oil flood - created by Saudi Arabia - caused the oil price to collapse from $30 to $10 (minus 70%  morganstanley).  Did this oil collapse lead to an "Oilmageddon"? Did the banks make high losses and crash? Nope. The US economy grew in the years 1986 & 1987 each 3.5% (annual GDP growth) and accelerated to 4.2% in 1988 (worldbank). In the period 1985 through 2000 cheap commodities in combination with falling interest rates and a technological revolution (Internet) induced a period of prosperity (with the exception of 1992 as the first Iraq war caused an oil price spike which caused a mild and short-lived recession), the longest boom in U.S. history (factcheck).

History shows the oil price hikes are bad for the global economy (like the oil shocks of the 1970s), oil price crashes are good. Period.

3. The number of oil consumers, who benefit from cheaper oil, is much bigger than the number of producers. There are 7 billion consumers on the world. Producer countries like Venezuela, Nigeria, Ecuador & Algeria aren´t really important for the global economy. The US is a net importer of oil and benefits more than it suffers. Europe, China, Japan, India & the majority of the rest of the world don´t have much oil, if any.

4. The banks managed the impacts of the steep drop of prices for oil and other commodities on their loan portfolios better than feared so far, helped by a solid consumer business. Recently the US banks reported their financial results from Q4 2015. All big US banks - JP Morgan, Citigroup,  Bank of America, Morgan Stanley, Goldman Sachs, Wells Fargo & PNC Financial, Bank of New York Mellon, Capital On - beat the analysts`earnings expectations. JP Morgan declared that its fourth-quarter profits rose 9 percent from a year earlier, helped by a strong performance in its consumer banking division and lower legal expenses (finance.yahoo). 

 Why should we believe the Citigroup and her economists? In 2008 the bank had to be saved because these people had no clue about the economic environment. The talk about an "Oilmageddon" is just fear mongering and quite nonsense.