The link between the global economy and oil prices may have “de-coupled” in July 2008 as oil prices rose to $140 and the recession took hold across most economies around the world. Some of the increase in oil prices then was tied to speculation, and some to a fear that global supplies were dwindling faster than expected.
The price of oil and the economic slowdown began to form a strong link earlier this year as crude prices dropped below $40 as the worst of the recession developed in the first and second quarters.
Oil prices have risen and fallen sharply over the last several months. A great deal of the movement was tied to a weak dollar, but supply and demand must eventually take a major part in determining crude prices. That process appears to have begun again.
China and India recently posted GDP growth of around 8% for the third quarter. The US broke out of the recession and many analysts think that economic improvement in America will be 4% in the current quarter. Even several of the largest countries in Europe have started to show very modest improvements in GDP.
Crude moved above $77 today and it seems to be going higher. OPEC said it would hold production flat, a sign that it believes that demand can move prices up and that it can be blameless because it has taken a laissez-faire position in the market. The International Energy Agency reports that it expects demand to rise modestly next year, but that does not take into account a potential sharp improvement among the largest economies. “Peak oil” is only a theory, but most analysts believe that the supply and production of oil will begin to fall off within the next decade or two.
All of that information should lead economists to the belief that the overall trend in crude prices is up, and it will stay up for the short-term simply because the improved economy and increased demand will force it in that direction.
Douglas A. McIntyre
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