Gas prices have dropped significantly, reaching an astonishing national average of just $2.03 per gallon, according to a recent AAA fuel gauge report. This figure represents a remarkable decline of 38 percent from last year’s average of $3.28.
This price reduction is projected to save the average household around $750 on fuel costs this year—a considerable relief.
However, the notable drop in gas prices is only part of a larger picture. Oil prices themselves have plummeted by 55 percent over the past year, indicating a significant price collapse. What are the underlying causes?
Many believe that lower fuel prices will stimulate economic growth, allowing consumers to spend their savings on various goods, which in turn will boost gross domestic product. While this reasoning appears sound, the rapid and extensive decline in oil prices may signal deeper issues within the global economy—including the U.S. economy itself.
Global Recession Indicator
At Economic Prism, we suggested a few weeks ago that this price drop is less a result of increased production and more a reflection of a decelerating global economy. It’s clear that the decline in prices is driven more by reduced demand than by heightened supply.
In a recent survey conducted by ConvergEx Group, investment professionals were asked, “What oil price would indicate that a global recession is unavoidable?”
“The premise behind this question is straightforward—there comes a point when falling oil prices are no longer a mere theoretical benefit to economies worldwide,” explained Nicholas Colas, chief market strategist at ConvergEx Group. “Instead, they signal a rapid contraction in global demand, necessitating a swift price drop to align with this reality.”
The most common response indicated that $30 per barrel would be the threshold signaling an impending global recession, with 26 percent of respondents agreeing. Another 16 percent suggested that $35 per barrel would indicate the same. Collectively, 62 percent of participants identified oil prices at $30 or lower as indicators of a looming recession.
Currently, oil prices are hovering around $48 per barrel. However, if global economies are truly slowing—an assertion many analysts believe—it’s possible that oil prices may continue to decline, potentially reaching the $30 mark, which was the low point on December 28, 2008, during the last major oil crash and the Great Recession.
Lower Gas Prices and the New Global Recession
The future of the global economy remains uncertain; it could either recover or slip back into recession. What is evident, however, is the transformation of once-thriving oil and gas towns into desolate areas.
Consider Crosby, North Dakota—a town that was flourishing just months ago, having invested $10 million to develop land for incoming oil field workers and businesses.
“The year they planned this development could have seen much commerce, but now? It feels like a street to nowhere. Streetlights are on, yet no one is home,” stated Cecile Krimm, editor of the local newspaper, The Journal.
The emptiness along this newly constructed thoroughfare paints a picture of an “echo economy,” where Americans perceive falling oil prices not as a windfall, but as a looming threat. Towns across the nation, from remote areas like Crosby, which once saw rents rise to levels comparable with San Francisco, to urban hubs like Houston, are bracing for significant layoffs—estimated at up to 75,000 jobs.
In this context, declining oil prices may create a double-edged sword: they jeopardize the oil and gas sector while also foreshadowing a new global recession.
“We can’t simply drill our way to lower gas prices,” President Obama remarked back in March 2012.
Nevertheless, lower gas prices are currently a reality. If these reductions did not stem from increased drilling, alternative factors must be at play. In the months ahead, we will gain more insight, and a new global recession could be one of the outcomes.
Sincerely,
MN Gordon
for Economic Prism
Return from Lower Gas Prices and the New Global Recession to Economic Prism
