There will be many dress rehearsals in commodity markets before the next global recession. An example is last week’s dramatic and broad-based sell off that took oil prices for over a $10/barrel tumble. And there is no doubt that despite the scarcity of the resource, the price of oil will crash the next time the global economy sewers.

But is that time already upon us? If the monetary authorities in China and India continue to hike interest rates at the pace they have set recently, the next global recession may not be that far off.  After all, these economies are today’s global economic growth engines. But when push comes to shove, the political masters of those central banks may soon temper their enthusiasm so they can battle inflation.

If the money-printing U.S. Federal Reserve Board doesn’t care about inflation why should the People’s Bank of China ? Compare income per capita between the U.S. and China and it is not too difficult to figure out which one should be more desperate for economic growth and, as a result, more willing to seek trade-offs against inflation.

In the meantime, there are several tactical paths China can take that at least give the appearance of holding inflation in check. Reducing the weighting of food and energy prices in China’s consumer price index would be one way. As long as the country’s headline inflation rate stays below 5%, markets won’t get too upset about what it is really measuring.

Having the People’s Bank of China step away from the U.S. treasury auction could be another way of keeping reported inflation at bay. A soaring Yuan, and hence tumbling import prices would provide a partial offset to building domestic price pressures such as what led to the recent truckers strike in Shanghai.

Of course, there could be other reasons for commodity market sells-offs in the future. But let us not lose sight of the forest for the trees. No matter how much oil prices and other key commodities such as copper and grain fall, look at the parameters in which they now move.

Even land-locked oil prices like West Texas Intermediate barely dipped below $100 per barrel. And Brent, the world oil price never made it below the triple digit price threshold.

How the goals posts have moved. Five years ago, those prices would have been all time highs. Last week, they generated headlines of plunging oil prices.

What hasn’t changed however is the intrinsic relationship between oil and economic growth. Ratchet down expectations for economic growth and quite naturally you lower expectations for future oil prices.

But that’s only because without burning more oil, there is no economic growth.



  • oilwatcher

    Doesnt Jeff find it interesting that over a million barrels of lost production from Libya has not caused an oil shortage. Oil is not that expensive in 1975 dollars…It was cheap for a while. Yes, we will have 200 oil but not today, and not tommorrow.(barring wars of course or huge terrorist events) I remember the day in my province when my water bill was $75 a year…now it is $500. When it was $75.00 a year, oil was 25 bucks a barrel. Water is up more than oil…and in my province…We would like most of it to go away right now….WAY WAY too much water….

  • Rojelio

    Oil is still dirt cheap by some measures. A couple of pre-1965 dimes containing 90% silver can still buy more than a gallon of gasoline. In other words, 20 cents of actual money still buys quite a bit of gasoline. Viewed in another way, a gallon of gas has been calculated by some to represent about 500 hours of human labor. A pretty good deal for less than $4/gal of inflated currency.

  • Dhouston

    And what caused the drop in oil? The increase in margins on silver which lead all commodities down. Yesterday they increased margins on oil and look what happened. It illustrates the real cause for the high oil prices. Speculation

  • Dhouston

    And what caused the drop in oil? The increase in margins on silver which lead all commodities down. Yesterday they increased margins on oil and look what happened. It illustrates the real cause for the high oil prices. Speculation

  • Anonymous

    A large part of it is speculation, which explains the volatility. Most of the times speculation exarcebates and/or accelerates trends but it almost always follows some actual indicator- in this case, low expectactions on growth and consumption.

    However the price trend for oil and commodities is always upwards, because of demand, the most basic and measurable reason of all. Until it hits a ceiling,that is, like where we are now.

    I figure that in the medium term, the crashes in oil prices due to drops in OECD economical activity will fade into the continuous growth by the BRICs and volatility will be less common.

  • Steve Manders

    People are preoccupied with the day to day bounces in oil prices, it is irrelevant  when compared to the long term trends.   Ignore the bumps, look at the hill ahead of us that must be climbed.
    The oil price in 
    January 1999,  $9.67 a barrel
    most of 2000   $20.00
    most of 2005   $40.00
    most of 2010   $80.00
    most of 2011   $105.00

    And you you still concerned about the weekly price swings and the many little reasons that caused them?

    World oil production per capita peaked in 2005,  We now have 7 % more people sharing 2 % more fuel, for a net decline of 5 % per capita.  The USA is using 8% less fuel, for 4 % more people for a 12 % total per capita decline.  The limited supplies are creating demand destruction by rapidly rising prices.   We still have not addressed an absolute  world decline in oil which is  likely to occur this year.

    Enjoy gas while it is still cheap, this may be your last chance for an affordable over seas trip, or a chance to pull your RV across the country.

  • Abitibidoug

    Yes oil is still relatively cheap, at least in North America. Despite higher petrol prices, I still see a lot of people making one person car trips. While travelling on the 401, a major highway in southern Ontario, I still see most cars and trucks going well over the posted speed limit of 100 Km per hour, which burns more fuel. I don’t know what price for petrol or diesel fuel will be required to really change most peoples habits, but we’re not there yet. We’re getting closer though, as small cars are selling better (and trucks or SUV’s selling less) than last year or earlier this year. If you need a truck for your farm or business, now would be a good time to buy one, new or used, as they are much less sought after (and thus cheaper) now.

  • SL

    Jeff: Please read my commentary “Oil Shocks
    and the ECB”, Ref your post above. Maybe we already got the recession you
    were looking for. Best, SL