Of Oil Spills, Both Old And New

We have a question.

The price of oil has been on the decline of late, and we?re not sure what to make of it.

As you can see, we’ve retreated from $110 to $77 in just three and a half months, and that reminds us of a similar decline that occurred back in the summer of 2008, just as the sub-prime crisis came to a head and the stock market began its fabulous unwind.

Of course, back then oil lost a full 73% of its value, falling from a sky-high $150 a barrel to a lowly $41 before turning higher with the economic recovery that began in early 2009. But while it was falling it also managed to pull the entire stock market lower with it.

Oil proved a leading indicator at the time, pointing to a pending slowdown in global growth that was presaged by a steep drop in the demand for crude.

Will it happen again now?

To put it more sharply, is the current drop in the price of oil indicative of a similar slowdown, or is it a mere a retrenchment, a liquidation due to reduced fears of an imminent Iranian conflict?

From another angle, could oil be smelling a coming European contraction? A bigger than expected diminution in Chinese growth? Or have the speculators merely run to the caves, leaving the shorts to dominate the crude pits?

More to the point, perhaps, is the question of whether the latest 30% decline in crude will be sufficient to cut industrial costs and the price of retail gas consumption to the point that profit margins and personal spending are enlivened.

Eventually, of course, that has to happen. When the price of a commodity like oil falls this steeply, so, too, does the cost of living and doing business. And that eventually leads to profits and spending.

It?s not an easy question, to be sure. And signs of an economic upturn are not easily found. But the general fall in commodities prices ? not just oil ? will undoubtedly be a boon for consumers.

Here?s a chart that shows the rough dollar amounts that falling commodity prices contribute to the economy.