Is a Recession Just Around the Corner?

The Economics of Politics (Part 2)
February 25, 2016
Nope. No Recession.
February 26, 2016

The US economy entered recession territory in November of 1973 and remained there for 16 months. Most economists attribute the economic decline to the quadrupling of oil prices by OPEC.  In October of that year, Arab nations began an oil embargo against the US (and others) – purportedly due to our ‘support’ of Israel in the Yom Kippur War – which resulted in oil prices rising from about $3 per barrel to about $12. Ouch.

Global recession, inflation and rising unemployment were the immediate and direct result.

Fast forward to 2015. We’ve all seen oil tank from about $100 a barrel to near $30 – about 1/3 the price of where it’s been for the last 5 years. The opposite of what happened in 1973. Yet we haven’t seen the inverse of the 1973 economic effects. Why?

For the past 5 or so years, WTI has hovered between about $115 and $85 per barrel. The IEA believes the world consumes about 94 million barrels of oil each day. At $100, this equates to an expenditure of $9.4 billion every day. At $30, the global cost is about $2.8 billion – a cost reduction of about $6.5 billion EVERY SINGLE DAY.

Or about $200 billion a month…or $2.4 trillion per year. Let me repeat this: Oil consuming countries have cut their oil cost by about $2.4 trillion per year!

So why aren’t we seeing a global economic explosion? A huge increase in corporate profitability? Why are we talking about a recession instead?

Could it be that the US is more of an oil producer than an oil consumer today? Is oil production a critical part of our GDP? No it isn’t.

Depending on who you ask, US oil investment represents only about 9% of total US CapEX and about 12% of the overall US GDP.

So why talk about a recession?

0 Comments

  1. Biil Baldwin says:

    So you aren’t buying the China is falling off the cliff and taking us with them fear mongering, nor the Nostradamus “It will happen every 5 year” cycle?

    • TerryLiebman says:

      Great comment! China is certainly a real issue today. They are now responsible for about 20% of global GDP. Depending on who you ask, their GDP now exceeds $15 trillion annually. But falling off a cliff? No. Their growth rate is slowing, but their annual GDP growth rate is still double or triple that of the US. And recessions are usually triggered by events, not time. Sure, time has an impact – more from a ‘behavioral economic’ perspective – but the trigger is usually more tangible.

  2. jason lavin says:

    From what I can see, the Chinese are on a buying spree – lots of gold… and even F100 companies. If they have major economic slowdown there (which we’ve been reading about) they will probably *hide* it through acquisition, no? Thanks for blogging again.

    • TerryLiebman says:

      Thanks Jason…interesting comments. Frankly, I’m not aware of an increasing appetite of The Peoples Bank of China for gold bullion. Most central banks, including the US FED, acquire and hold gold as reserves. All part of their larger strategy. That said, I’m not aware of an increasing rate of acquisition in China. You are correct: China does like to “hide” many financial and economic realities … making their “numbers” more of an indicator rather than a beacon of truth. Take all their numbers with a grain of salt. 🙂