The Price of Oil and the Economy

May 5, 2020
Oil Prices
Last week, oil prices fell to lows not seen for 70 years.


It was almost 50 years ago that the rising price of oil was one of the factors which helped plunge us into a deep recession. And while not the most important factor, subsequent recessions have followed previous peaks in oil prices. It seems that today's recession has just about turned all our assumptions around. Of course, we have never had a recession in which the economy was turned off like a light switch.

The switch did not give enough time for oil production to react and we find ourselves awash in oil decades after a recession was caused by shortages. While cheap gas (and no it will not be free…) may be very attractive to consumers, it is not so positive for the economy in general. As a matter of fact, it is a stark reminder as to how deep the economy has sunk in a short period of time.

This is why stocks reacted negatively in the week that oil prices fell to levels not seen for over 70 years. Interest rates, already at record lows, also eased somewhat. If oil prices stay this low, another important sector of the economy would be in deep trouble. Let's hope adjustments are made to bring oil back to a reasonable level. This is just another reason to root for a quick economic recovery which is dependent upon progress in containing the spread of COVID-19. The meeting of the Fed last week seemed to indicate that it is preparing for a long fight.