Energy Prices May be Teetering With Recession Signals Flashing
Monday, January 14, 2008
Despite speculation that oil futures prices could surge well beyond $100 a barrel in 2008, potentially lifting natural gas prices in sympathy, there's growing consensus that the US economy is on the ropes, and history shows that economic recessions produce notably lower -- not higher -- energy prices.
"This recession is a little different from the last recession because the last one was a result of Fed activity, while this recession is a result of high energy coupled with a crisis in the financial sector and mortgage industry," said Mark Weisbrot, co-director for the Center for Economic and Policy Research. "But just like we've seen in the past, if the US moves into a deep recession, it will likely pull down the price of oil and energy.
Weisbrot isn't alone in his assessment, as more leading financial firms are warning that if the US isn't in a recession it soon will be.
"Over the past few months, we have become increasingly concerned that the US housing and credit market downturn would trigger not just a growth slowdown and substantial Fed easing -- our long-standing view -- but also an outright recession," Goldman Sachs said in a note to clients last week. "The latest data suggest that recession has now arrived, or will very shortly."
Meanwhile, Merrill Lynch's North American Economist David Rosenberg is convinced that the US is already in its first full-blown recession in 16 years. Rosenberg has been warning of a consumer recession since the third quarter of last year; but after recent payroll data showed unemployment had spiked to 5%, he called for an outright recession.
"This is just another case of history repeating itself," said energy futures broker George Speicher. "Each time the characters might be a little different, but the overall story never changes. And it usually includes oil price shocks, which precede a recession."
For the last 30 years, spiking oil prices has been a factor in every US and world recession, though not all oil price spikes lead to recession.
For instance, the 1974-75 global recession was triggered when the Arab oil embargo tripled prices; the 1980-81 global recession was triggered by an oil spike in the wake of the Iranian revolution and the 1990-91 US recession was partly caused by rising oil prices following the Iraqi invasion of Kuwait.
Today, there are concerns that high energy prices are exerting a significant drag on the global economies, which would only be exacerbated if tight oil supplies get tighter in the wake of an all-too-possible crisis in the Middle East or West Africa.
Typically, rapidly rising oil prices can cause "stagflation," in which consumer prices rise while the economy of the oil importing country sees little or no growth. Private estimates of the negative effects of an oil shock range between 0.3% to 1% of GNP growth for the US and other G-7 countries.
The damage done depends on the size of the shock, both in terms of the percentage increase in oil prices and the real price, the shock's persistence, how dependent the economy is on oil, and response of monetary and fiscal authorities.
The state of the economy has a major impact on natural gas consumption for industrial use and to a lesser extent on commercial customers. For instance, during the economic recession of 2001, natural gas consumption by the industrial sector fell by 6%. Prompt-month gas futures prices started off 2001 in the $9.40s, only to collapse into the $1.70s by fall that same year.
It's a well established trend that higher oil and gas prices before a recession are followed by falling prices amid decreased demand and tightened spending. For Instance, $32/bbl oil that preceded the 2001 recession was followed by $17/bbl oil as economies sputtered in a world-wide slowdown.
“Without US demand and without stronger economic growth, crude oil can’t stay in the $90s,” said James Cordier, president of Liberty Trading Group in Tampa, Florida. "About 50% or more of US consumer spending goes toward energy -- both directly and indirectly -- and during times of recession and economic slowdown you can expect a sizeable pull back in oil and gas prices because consumers tend to slow spending wherever they can.
"It wouldn't be out of the question to see oil prices back into the $80s or a little lower, which will drag gas prices lower, too. But global demand outside the US will probably keep oil prices from all-out collapsing."
Alan Lammey, Houston
************************************************************
Oil prices did in fact go down to $17/bbl. in the last recession but they were down there only briefly. See a chart of the price of oil since 1978 at oilnergy.com . As shown there the crash in oil prices from that recession only lasted a few months.
I would like to match up the graph of the crash in oil prices during the last recession with the timing of such recession and, more importantly, the timing of the news that confirmed the presence of such recession. Does anyone remember (or can anyone point me to where I can find) when the recession became confirmed by the economic data? I seem to recall it revolving around the 9/11 attacks but I could be wrong. |
