Economics: Falling Oil Prices Are An Economic Stimulus, Not An Economic Indicator

(Drivebycuriosity) - Stocks & oil prices sharply fell hand in hand.  The tandem is based on  misunderstandings and on economic ignorance. Falling oil prices are not an indicator of a weak global economy and they don´t announce a coming recession. In 2015/16 the price oil dropped about 70%, but no recession followed (chart below). The global economic expansion continued. Low oil prices helped the 2010s to end without a recession, continuous economic growth, a record low jobless rate & strong stock market gains.

In the early 1980s happened a similar oil price drop. Then Non-OPEC nations countries outproduced Opec (as Russia & US do today) and despite repeated production cuts by Opec the oil price fell back into a range between $10 and $20 where it stayed until 2002 (seekingalpha). This allowed a decade of a prospering economy and a rally on the stock market during the Dow Jones climbed from 1,000 to 10,000.

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The recent oil price crash was intended by the Saudis, who apparently control Opec, and are a strategic move. The Saudis are trying to swipe out their competitors in Russia and the US, the frackers, as they tried unsuccessfully in 2016 . However, the oil price drop is a gift to the global economy. Falling oil prices are a huge stimulus program. They will help to smooth out the perilous influences from the cornonavirus on the economy.

Dropping prices for oil & gasoline work like a tax cut. Consumers worldwide have more money to spend for other goods & services. So cheaper energy prices stimulate consumer spending which accounts about 70% of the US economy. Dropping energy prices also translate into lower transport costs - thanks to cheaper Diesel - which lead to lower prices for food and other goods. They also reduce the cost to produce steel, cement and many other energy intense goods. Many things which are made from oil, like cleaning fluids, laundry detergents, paint, pharmaceuticals, cosmetics, hygiene products, diapers & plastics, also get cheaper.

Because of sharply falling energy prices we will see lower inflation rates in the coming months. This allows the Federal Reserve to cut her interest rates without fueling rising inflation expectations. The twin package of cheaper energy & low interest rates will help to cope with the perilous influences of Sars-CoV-2 and to avoid a recession.