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.”

9 Comments

  1. What American do you know that holds off from making purchases hoping for a lower price? Deflation will never happen in the USA.

    1. This feels especially wrong in the case of oil. Are people going to drive less because they think gas will be cheaper next week? Buy less heating oil because prices might drop soon? Petroleum strikes me a a textbook case of inflexible demand.

      1. Products that are transported by truck SHOULD experience falling prices that are the direct result of the actual cost of bringing those products to market, just like airline fares SHOULD drop when fuel costs are less. This is not deflation. And when they don’t drop that is the result of GREED.

    1. A couple of links for Mr. Shilling. Turns out he worked for Standard Oil/Exxon/Mobile (per LinkedIn) for a bit and has connections to White Weld and Co. (from Wikipedia), an old investment firm with ties to the Bush family. So there is obviously no influence from big oil in his commentary.

      https://www.linkedin.com/profile/view?id=ADEAABUwOegBPa_p-obf9ZodThNFBCKo3qTYjyM&authType=NAME_SEARCH&authToken=hhga&locale=en_US&srchid=163584531441316022872&srchindex=1&srchtotal=11&trk=vsrp_people_res_name&trkInfo=VSRPsearchId%3A163584531441316022872%2CVSRPtargetId%3A355482088%2CVSRPcmpt%3Aprimary%2CVSRPnm%3Atrue%2CauthType%3ANAME_SEARCH

      https://en.wikipedia.org/wiki/White_Weld_%26_Co.

  2. More scare tactics from Texas oil interests. Don’t these people ever give up. When do we start bottling Lake Michigan.

  3. I’ve been cheering on the Iran deal, in part due to the inevitable decrease in oil prices. Am I supposed to now believe that’s a bad thing?

  4. This premise is bullshit. If for no other reason than oil isn’t like most commodities: You can’t store it for long — and when you need it, you need it.

    No one is going to hold off filling their gas tanks because the price might be lower next week. And large companies — not even airlines — are unable to hedge commodity prices for terribly long without taking huge (and therefore often unacceptable) risks. Indeed, those airlines which haven’t done advance fuel buying are now actually ahead of the game.

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