Plummeting Oil Prices May Not Be A Cause For Celebrations, Recession Could Be Just Around The Corner

Everybody seems to the talking about the plummeting oil prices these days. While Americans may be in a jovial mood due to the same, the steady drop in oil prices could be an eerie indicator of impending recession.

Oil prices took another fall on Wednesday to fresh five-year lows on signs that the global supply glut driving the sell-off is deepening. This is primarily because new data coming out of the U.S., the world’s biggest oil consumer, showed an unexpected and unprecedented increase in crude supplies. The benchmark U.S. oil price slid 4.5 percent to $60.94 a barrel.

Incidentally, not only is this the lowest level since July 2009 on the New York Mercantile Exchange, the fall on Wednesday was the biggest one-day drop since Nov. 28, when the Organization of the Petroleum Exporting Countries (OPEC), the cartel that controls majority of the oil supplies to the world, decided to maintain its oil-output target. If that’s not all, reports released by the cartel, point to lower demand for the group’s oil in 2015.

Dropping OIl Prices Could Hurt American Economy

All this combined singularly means that oil prices could continue to fall for quite some time in the future or at least until the 12 member states of OPEC decide to boost sagging oil prices simply by cutting production. If the OPEC countries do decided to curtail their production, many of the countries that depend on the oil supplied by these countries will enter a recession a lot sooner than expected, reported NASDAQ.

Moreover, the lowering of oil prices is hitting U.S. stock market harder than ever. The latest plunge in crude rippled through U.S. stocks, helping to drive major indexes lower. The Dow Jones Industrial Average dropped 268.05 points or 1.5 percent to 17533.15, its biggest one-day decline since Oct. 9. Not to mention, energy stocks were the worst-performing sector of the S&P 500 on Wednesday.

In simpler terms, oil companies are scrambling to compete with one-another, and the easiest way to retain customers is to undercut prices. However, oil’s largest consumers, apart from America, have had their demand stabilize owing to a slowdown in China and Europe.

The prices of oil are being driven down primarily by intense shale oil exploration in the US, which has added about four million barrels per day since 2008. Moreover, the relaxation of sanctions against Iran and its gradual return to the world oil market, combined with enhancement in production of Libya and Iraq, could mean the oil prices will continue to experience pressure owing to higher rate of supply than demand.

The great financial crises hit America in 2008, when a similar situation occured, reported Business Insider. Interestingly, the U.S. economy was much stronger then. While the economic trajectory is a little less steep now, Americans will have to closely watch their expenditure to ensure they have ample resources to comfortably survive the impending financial crises that happens with alarming regularity.

[Image Credit | FRED, Sofia Ordonez /CNN Money]