Could Plummeting Oil Prices Cause the Next Recession?

A. Gary Shilling, in Bloomberg View: “Oil-importing countries are obvious winners from falling crude prices. That includes the U.S., where — despite a surge in domestic production — imports still account for nearly 50 percent of petroleum consumption.”

“Lower oil prices, however, could come with a downside. As they work their way through the system, deflation could follow … The risk is that deflationary expectations could follow, encouraging consumers to withhold purchases in anticipation of even lower prices.”

“If that happens, excess capacity and inventories would build, forcing prices down more. When buyers’ suspicions are confirmed, they further delay consumption, in a vicious downward cycle. The result is little if any economic growth, as deflation-prone Japan has seen over the last two decades.”

“I believe the Fed will hold off on a rate hike until next year, at the earliest. But if it does move this year, and commodity prices tumble, China slumps and deflation sets in, it could soon wish it hadn’t.”

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