If the global society continues to use the same volume of oil but spends less money on it, the effect will be less of a transfer of wealth to oil producers and more buying power available to conduct other activities. Rather than producing just a barrel of oil, the society will produce a barrel of oil [B]and[/B] something else. Don’t fall victim to the broken window fallacy. We must not fail to see the end result of any given event on production and lower oil prices will result in MORE production of other goods. That is not recession, that is economic growth.
Economic growth depends on credit. Many oil producers will default at lower prices which can cause tens if not hundreds of billions of dollars of losses for creditors which will make credit harder to get, slowing down capital investments by companies in every sector, reducing economic growth. You can’t make a blanket statement that extended, extremely low oil prices will be good for the global economy. Has the drop in oil thus far been good for the global economy? Yes. Would an extended drop to $20 be good for the global economy? More then likely not. You have to keep in mind the fact that the oil sector’s boom in the US has played an absolutely critical role in pulling the US out of the economic slump caused by the 2008 recession. Oil at $20 essentially would make all that go away, (as the cheapest shale US shale oil is being produced at a cost of $40) plus the huge investment losses and debt write offs that would follow.
The data never lies. Oil has always been incredibly low during early expansion phases and tends to remain low until the next recession. Energy prices puts pressure on households, while you may be partially right on Russia it is an isolated situation made worse by Western sanctions.
See chart below 1999 - To present Click link for details.
Happy New year
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SAUDI OIL MINISTER: I Don’t Care If Prices Crash To $20 — We’re Not Budging