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By New_Deal_democrat January 27, 2015 10:16 am
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History: a steep drop in Oil more likely forecasts the bottom, not the beginning, of any global recession

Via Jeff Miller (http://dashofinsight.com/weighing-week-ahead-time-focus-europe/)
we learn that Wall Street traders think</a> that, if Oil falls to $30/barrel, that would be a sign of a global recession.  From the Marketwatch article (http://www.marketwatch.com/story/story?guid=007e38da-a259-11e4-8b1e-16be...):

"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 underway.  In fact, if we start from the proposition that there were a global recession, $30/barrel gas would be a sign that it is closer to ending that beginning - and 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 producer 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 underway.   For the effect of a big decline of Oil prices on an economy already in expansion, look no further than 1986.

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