Declining crude prices and the economy: What lies ahead

When current crude oil prices dip to lower than $90 per barrel and pump prices of gasoline seem to match the trend, motorists have all the reason to rejoice.  However, this euphoria could be fleeting, especially when these are but hints of an impending weakening economy or worse, a new round of recession.

It’s the first time since 4Q2011 that crude prices have nosedived below $90. Prior to this decline, benchmark U.S. crude oil was $90.86 pb, while Brent crude oil was $106.83 pb.

Prices are being pushed down because of abundant oil supply amid a not-so-strong demand.  A slack in economic activity in the U.S. and China and a somewhat less intense relations with Iran has also triggered a decline in oil prices.  Experts note that prices may go down further once recession hits the European Union.

Last month’s decline in oil price (of about $15 per barrel) seems not enough for Saudi Arabia thus, the oil-rich nation is trying to drive prices down some more.

The drop in crude oil price is something to be happy about since this has led to a 27-cents-a-gallon savings on the cost of gasoline.  But, what lies ahead is a possible recession that everybody, including motorists, won’t be happy about.

The price of crude oil in the near future will most likely hinge on what’s going to happen next to the EU’s economies. A recession, if it really does happen, will dampen demand for oil.

While this probable EU scenario could trigger another dip in oil price, some sources say that, for now, it has already reached rock bottom. Money Morning reported that, looking at long-term possibilities, prices of oil will no longer fall. They are more likely to go up, albeit following a more gradual movement. It further noted that “Current crude oil price levels will likely serve as a base for a rebound in the second half of the year, continuing into 2013”.

Observers advise that the public just take advantage of the prevailing cheap gas prices, but warns that recession might soon reveal its ugly head. An economy that’s rapidly growing means more demand for oil, but a slow moving one means a weak demand for this and other commodities. As always, one of the major factors that has boosted economies is demand for crude.

A former economist at CIBC World Markets, Jeff Rubin reminded that during the recent recession, crude oil prices per barrel nosedived to a low of $40.  An exceedingly low oil price, he said, could result in a sluggish economy.