Gas prices are headed below $2.00 a gallon in the southern U.S. due to the region’s low taxes and numerous refineries as oil prices continue to fall, but the decline points to the beginnings of a global recession.
The price of crude oil is falling towards $40 a barrel, and while this benefits American consumers, especially those in the south, it indicates a global recession because production alone is unlikely to cause such a drastic decline in oil prices.
“Oil’s decline is proving to be the worst since the collapse of the financial system in 2008 and threatening to have the same global impact of falling prices three decades ago that led to the Mexican debt crisis and the end of the Soviet Union,” Bloomberg reported.
The prices are declining partially due to the Organization of Petroleum Exporting Countries’ decision not to cut production to try and force the U.S. shale industry out of business.
It’s already beginning to work. Several American oil exploration and drilling companies are slowing down because the industry is already close to unprofitable.
“In 2016, when OPEC completes this objective of cleaning up the American marginal market, the oil price will start growing again,” industry insider Leonid Fedun told Bloomberg. “The [U.S.] shale boom is on a par with the dot-com boom.”
“The strong players will remain, the weak ones will vanish.”
But can production alone account entirely for the 37% decline in oil prices since July? It would appear a lack of demand combined with no cuts in production are driving oil’s free fall, and imploding demand is indicative of a global recession.
For one thing, there doesn’t appear to be any market analysts who predicted such a huge drop this past summer when oil was still above $100 per barrel and analysts are typically hesitant to predict major recessions.
“Given the presumed 17% to 20+% expansion of the global economy since 2009, the small increases in production could not possibly flood the world in oil unless demand has cratered,” Zero Hedge wrote. “The ‘we’re pumping so much oil’ rationalizations for the 37% free-fall in oil don’t hold up.”
“That leaves a sharp drop in demand and the rats fleeing the sinking ship exit from ‘risk-on’ trades as the only explanations left.”