The dramatic fall in the global price of oil is being cited by the financial press, government officials, and academia as the catalyst for the recent abysmal U.S. economic data which shows that the economy is, in all likelihood, sliding into a recession or worse.
Oil prices in dire straits…
While falling oil prices sound like a plausible explanation for the abysmal financial numbers, anyone with a modicum of economic sense (which excludes much of the financial Establishment) can see that it is merely a smokescreen to obfuscate the real culprit.
The fall in oil prices, while detrimental to many oil producers, should actually be a boon for the rest of the economy, especially those industries that are heavily reliant on energy. Lower fuel prices mean lower production costs leading to, ceteris paribus, greater output.
The price of gasoline has declined precipitously – click to enlarge.
For consumers, lower oil prices mean lower utility bills and cheaper gasoline, both of which mean more disposable income for either savings or more consumption. Why would greater disposable income lead to a recession?
Naturally, lower prices are not good for oil producers. But a decline in one sector of the economy (albeit an important one), does not lead to a general collapse. While the energy sector may be contracting, industries that use fuel should be able to expand as their production costs fall.
What constitutes great news in oil exploration nowadays
The Pseudo-Prosperity of the Printing Press
The Federal Reserve’s Quantitive Easing (QE), Zero Interest Rate Policy (ZIRP), Operation Twist (OT), and their variations have created a massive bubble in asset prices which is now beginning to burst.
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