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Will the Oil Patch Bust Trigger Recession?

July 22, 2015

Will the Oil Patch Bust Trigger Recession?

This seemingly inexhaustible credit line is now drying up, with severely negative consequences for oil producers with debt that’s coming due.

Could the oil patch bust triggered by oil plummeting from $100/barrel to $50/barrel kick the U.S. into recession? Longtime correspondent B.C. recently observed: The question is whether the incipient recession in the energy and energy-related transport sectors is sufficient this time around to be the proximate cause of a US/global recession and real estate bust.

To help answer the question, B.C. sent this FRED chart of key measures of economic activity in Texas, America’s GDP and industrial production and the price of oil. The chart may look busy but the key indicators are oil (the blue line that fell off a cliff and has formed a fish hook), the red line (GDP adjusted for inflation, i.e. real GDP), the dotted line (industrial production) and the remaining two lines that reflect the leading indicators and economic activity in Texas.

Six months into the energy bust, the leading index for Texas has hit the zero line, U.S. industrial production has rolled over but real GDP hasn’t budged. So far, the impact of dramatically lower oil revenues has been limited to the oil patch, but the potential for contagion is still present.

As B.C. noted:

The last time the energy sector experienced a similar bust as is emerging today and clearly evident in Texas was in 1985-86, which occurred coincident with the crash in the price of oil and the onset of the S&L Crisis.

However, the US economy overall did not experience recession, but Industrial Production (manufacturing) decelerated to around 0% even as real GDP did not get close to “stall speed”, owing primarily to the effects of Baby Boomers entered the phase of life for peak spending and household formation.

Also, it did not hurt that the constant-US$ price of oil fell from $37 to $16 (similar scale as the recent drop from $100+ to $50/barrel) and the price of gasoline to below $2/gallon.

 

 

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