Lower Oil Prices Courtesy Of A Slowing Global Economy

A global economic downturn will lower oil prices; good news for consumers and the US Strategic Petroleum Reserve.

Two powerful forces are now working together to contract world economic activity, and, by extension, lower the price of oil. The headwinds created by these two epic powerhouses are difficult, if not impossible, to overcome.

First, Central Banks around the world are racing to slow economic growth by raising interest rates and cutting their asset balances thus removing liquidity from the financial system. The expression “Don’t fight the Fed” flourished for a reason; the US Federal Reserve and its global counterparts can direct and implement market policies that strengthen or weaken economic activity, and their power over the markets is virtually insurmountable. Currently, Central Banks are aggressively trying to control inflation by slowing economic activity; unless they decide to change course it is only a matter of time when they succeed. It’s a safe bet that the global economy will slow down and maybe even shrink before the world’s central banks finish tightening.

Second, and perhaps more frightening, is the inevitable onset of winter in Europe. The loss of Russian natural gas supplies and the looming boycott of Russian crude oil by western countries and their allies will certainly result in catastrophic energy shortages across Europe. Germany is (is) the world’s fourth largest economy and, through its own surprisingly short-sighted dependence on Russian gas, will soon run out of capacity. in cold weather. German industrial production, which has been hit hard by high costs and limited availability of gas supplies, will come to an almost complete halt when the severe cold comes in January and February. Energy supplies will be directed to residential and emergency use only; the German economy would contract if not completely collapse, and the ripple effects would be felt throughout the world economy. This is not speculation; The cold of winter is coming, and it’s scary.

Oil prices may be negatively affected by a contracting world economy. It is likely that the price of crude oil, which has remained between $80 and $90 per barrel for some time, will drop lower as the economic situation worsens. OPEC sees this coming, which is the real reason for their latest production cuts. The decrease in demand for crude oil will overcome the slight decrease in supply of crude oil, and the price of crude oil will fall. With lower oil prices consumers will benefit, the global economy will benefit and recover more quickly, and the overall rate of inflation will eventually drop significantly. The US Strategic Petroleum Reserve will be refilled at a lower oil price than the oil that was removed from the reserves and sold earlier this year. That is good news for the US which, as an energy independent country, is likely to suffer the least this winter among many countries around the world, especially those in Europe.

It will take time, but as higher interest rates, reduced liquidity, and cold winters set in, the global economy will contract. This is due to the fact that the price of oil will also decrease.


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