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business newsWhat Low Oil Prices Really Mean
By
MoneyShow.com Sep 23, 2011 10:30 am
When oil prices start to decline, investors and economists get worried. But the trick is to dig a little deeper to find the opportunity.
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That explains the worry -- worried investors and economists are using oil prices as an indicator, and falling prices indicate bad times ahead.
But oil prices have to correct when economies slow down, or else high energy costs drag things down even further. And the current relationship between oil prices and global economic output is not pretty.
In fact, every time the cost of oil relative to global production has hit current levels -- and that’s after the sharp corrections earlier this month -- an economic slump, if not a recession, has followed, according to a Reuters article.
The “warning signal” that is currently flashing red is the Oil Expense Indicator, which is the share of oil expenses as a proportion of worldwide gross domestic product (specifically, it is oil price times oil consumption divided by world GDP).
Since 1965, this indicator has averaged roughly 3% of GDP, and has only exceeded 4.5% during three periods:
- in 1974
- between 1979 and 1985
- in 2008
In 1973-74, the Arab oil embargo sent oil prices rocketing skywards in the world’s first “oil shock.” In 1979, a revolution in Iran knocked out much of that country’s oil output and catalyzed the world’s second oil shock.
And, of course, in 2008 the housing bubble collided with speculative buying of new debt instruments and a commodities boom to propel oil prices to a record high of USD $147 a barrel, which helped to trigger the global financial crisis and the worst slump since World War II.
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