Hale Stewart

About the Author Hale Stewart

Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM from the Thomas Jefferson School of Law in domestic and international taxation where he graduated Magna Cum Laude and is also a Chartered Asset Manager, Chartered Wealth Manager and Chartered Trust and Estate Planner from the American Academy of Financial Management. He is the author of the book US Captive Insurance Law. You can read him daily at the Bonddad blog (www.bonddad.blogspot.com).

A Steep Drop In Oil More Likely Forecasts The Bottom, Not Beginning, Of Any Global Recession

Via Jeff Miller we learn that Wall Street traders think that if oil falls to $30/barrel, that would be a sign of a global recession. From the MarketWatch article: “The price of oil is about $17 a barrel away from signaling that a global recession is inevitable, according to a new survey of investment professionals.”

This puts the cart before the horse. History tells us that if there is a recession, it starts with an upward move in oil prices. By the time there is a steep decline, the recession has been well under way. In fact, if we start from the proposition that there was a global recession, $30/barrel gas would be a sign that it is closer to ending than beginning. And that would be a reason for the recession being about to end.

Let me start with a graph of oil prices over two periods: first from before the 1974 Arab Oil embargo through the 1991 invasion of Kuwait by Iraq and the subsequent war driving it out:

Next, here is the same graph from the late 1990s, when oil prices began their secular rise, to the present:

With the exception of the 1981-82 “double dip” recession brought on by the Fed’s merciless hiking of interest rates to break the back of inflation, and arguably the bursting of the tech bubble in 2001, recessions have been preceded by rising, not falling, oil prices.

Now let’s add on a layer of quarter-over-quarter GDP growth to each of these graphs:

A significant decline in oil prices has consistently led to rising, not falling, GDP several quarters out. Producers are able to produce more, and consumers to buy more, for the same price. This helps lead the economy back to growth.

Note that the above analysis starts from the assumption that a recession is under way. For the effect of a big decline in oil prices on an economy already in expansion, look no further than 1986.

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