Here’s Why The Oil Price No Longer Matters

Oil price doesn't matter

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A Low Oil Price No Longer Favors the Markets and Growth

It’s “damned if you do, damned if you don’t” when it comes to the oil price.

Contrary to what logic might suggest, there’s a good chance that the falling oil price will not stimulate demand and will instead send the world economy into a recession.

Of course, a rising oil price would not solve the problem either. It would cause inflation, which, when coupled with rising interest rates, would also end up causing a recession.

Could the problem have more to do with the dollar then? After all, there’s a growing discrepancy between the current strength—or perception of strength—of the United States economy and comparative weakness in the rest of the world.

When the Oil Price Falls, Everyone Suffers

But according to economists, when oil prices fall, it’s not just the oil-producing Middle Eastern and African states that suffer.

Since the United States started to become an energy exporter, thanks to the shale revolution, there’s the perception that manufacturing economies also remain affected.

Therefore, investors and consumers—suggests the logic—lose confidence in a self-fulfilling prophecy that leads to lower demand.

If the world perceives that the Americans are consuming less, the entire global economy experiences a recession.

Yet, as hinted earlier, the oil price factor may have more to do with the relative strength of the U.S. economy over the others.

By comparison, in fact, the world economy is in a recession. And the root cause must be sought in the dollar.

Not so long ago—say, in the 1960s, 1970s, and 1980s—a low oil price was more than desirable. It was essential to the then-leading economic powers, rebuilding and growing after World War 2.

The Seven Sisters

If the West was rebuilding in every sense, oil was a resource largely produced in the Middle East and North Africa, even if the market was controlled by seven major multinationals, including the Anglo-Iranian Oil Company (now BP plc (NYSE: BP)), Royal Dutch Shell plc (NYSE: RDS-A), Texaco, and Standard Oil (now Exxon Mobil Corporation (NYSE: XOM )).

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Gary Anderson 2 years ago Contributor's comment

Very interesting! Wages could run a little hotter in the USA. But wages are like oil. They seem to interfere with the dominance of American and western capitalism that reaps excess profits until it doesn't.