Oil Price Slump Doesn’t Mean Short-Term Economic Recovery Is Around the Corner

The crash of oil prices is neither good news nor bad news: It is neither a sign looming ominously and predicting that the world economic situation will worsen, nor a miracle that could get European or American consumption back on its feet.

The 50 percent oil prices plunge since last September is, first and foremost, a sign of the rise of American production, of the rise of the dollar and of the absence of turmoil surrounding supply in the U.S. and anywhere else in the world.

What came as a surprise at the end of the year is that the Organization of Petroleum Exporting Countries (OPEC) didn’t support the “Brent crude oil” prices: For the first time in 20 years, Saudi Arabia has decided to follow a market-share strategy.

Prices will stay pressured until the waning of the offer and the drill reduction returns things to normalcy, with prices up again around 2016 when shale volumes will start to fall.

The sluggishness of world growth doesn’t help, along with the falling prices of other raw materials such as iron ore that lost around 50 percent over the year 2014, or copper losing 15 percent.

Unusual Circumstances

Could the plunge of the barrel price boost the world economy? It is common to think that falling oil prices can be synonymous with lower taxes for consumers.

The money that won’t be spent to pay energy bills could be spent differently and could, therefore, boost consumption.

Moreover, companies could benefit from the falling prices of raw materials that could, either way, support their margins or raise their competitiveness.

These arguments were verified in the past, and most economists even think they are able to assess the expected positive impact on growth. It is, however, a bit like glossing over two unusual circumstances:

The first is that falling energy prices are not a thunderclap out of a clear sky. On the contrary, they appeared in a context where the inflation slowdown was already jeopardizing growth and the heavily-indebted European countries’ capacity to repay their debts.

As a consequence, expectations of inflation could see their situation get worse because of the falling price of oil. It’s far from certain that consumers will rush to spend their savings because of falling energy prices, or that companies will immediately reinvest their gain from increased margins into the economic circuit.

As the late Bernard Maris said: To understand economics, you need psychology. Maybe the extraordinary popular impulse of Jan. 11 in France could have an impact as strong as the falling price of oil.

Abrupt Fall in Price

The second unusual circumstance is the abruptness of the falling price that put into question the immediate profitability of a big part of the oil industry, triggering investment slowdown and credit deterioration for many oil companies.

Most of the shale oilmen in the United States need $70 per crude barrel to further push their investments.

These elements are likely, at least in the short term, to hamper global economic growth. A cyclical economic recovery might be sustained by cheap energy prices only in a second phase.

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