Will Low Crude Oil Prices Cause a Global Recession?

Abstract

International crude oil market faces almost 2 years of sharp fall in benchmark crude oil prices (mainly Brent) from $ 105.7 / barrel in June 2014 to $ 36 / barrel in December 2015 and a minimum of $ 27-28 / barrel (for the last 13 years), in January 2016. Several economists are raising the question whether low crude oil prices are a “growth factor or a curse” for the world economy, and whether they could even cause a recession. Opinions about the effects of the sharp decline, in world oil prices are divided. Some analysts say that such evolution is good for consumers, while others consider it is bad for the global economy. Low oil prices could create disadvantages by causing deflation. The risk is that deflationary expectations determine consumers to refrain from additional purchases in anticipation of even lower prices. This would lead to an excess of production capacity and to ample inventories that will force down the prices even further. When buyers’ suspicions are confirmed, they delay further consumption resulting in a vicious circle. Historically, plummeting crude oil prices have been perceived as a growth factor, especially in the net importing countries. But this has not yet been translated into tangible positive economic effects worldwide.

Keywords

• crude oil price
• crude oil supply
• fundamental factors
• macroeconomic effects
• deflation