The meltdown in oil prices has been touted in the media as the salvation of the consumer and business alike, the proverbial Rudolf the Red Nose Reindeer that saves Christmas. Other have correctly cautioned that the collapse in oil prices threatens certain high-cost producers, notably the shale oil producers in the US and Canada.
Obviously, there are a variety of factors that impact the supply and demand for oil and other energy sources and that these markets are global in scope. I follow the price of oil as a type of gage of the economy. Higher oil prices can be a indicator of Fed-fueled bubbles which leads to higher oil prices as entrepreneurs compete for resources to carry out their plans. Lower oil prices can be indicator that the economy is going into a correction or recession and that entrepreneurs are contracting their operations.
The accompanying graph shows the price of oil going back to 1990. The shaded areas indicate recession. The last three recession have been accompanied by a run up in oil prices and then the subsequent collapse coincides with a contraction in the economy. Regardless who the oil price helps or hurts, if oil prices continue to collapse, we should expect a recession coming and that in all likelihood that recession would be global in scope.
