Question: So, Which Is It, Recession or Speculation?

September 11, 2008
Offshore Oil Rig

Offshore Oil Rig

Citing over-production, OPEC says production will be cut by 520,000 barrels a day over a 40-day period. The oil-rich nations are doing so because of a dramatic and fast slackening in demand for oil, which begs the question: is speculation egging them on, or is the whiff of a deep global recession in the air?

On the ground, the announcement likely halts the precipitous drop in oil prices for now, with brent crude having dipped below $100 days ago. You day-traders will note that in New York, expectations for October pegged light crude at $103.34 a barrel, still much lower than the $147 seen in July.

With oil prices rising and quickly falling so dramatically in only three months, two factors are in play. Speculation on the price of oil definitively caused a big portion of the run-up in prices this summer. To some extent, we are all simply at the whim of market speculators and investors. It's the second possibility that's more worrying and less easy to fix quickly: as suggested by Goldman Sachs earlier this week, we might be in a global recession if we ever see prices below $100 a barrel--oil prices being a bellwether for reduced demand.

There is no doubt that worldwide oil demand has shrunk recently and quickly. Economic hardships aren't unique to North America, though our huge dependence upon fossil fuels and our long history of cheap oil has led us to a pretty tough fall, only compounded by the sub-prime mortage crisis. We're not alone: Britain's worrying over recession, and even some Asian tigers are looking at flat or slight growth in the months ahead.

Tell us what you think -- are we headed for a correction or a full-blown recession, based on oil prices?  Was the recent gas price surge just a fluke? Is it time to buy a dirt-cheap SUV with huge rebates while the getting is good? Or are hybrids, fuel-sipping diesels, and hydrogen vehicle development here to stay? Give us your thoughts, and while you're mulling it over, flash back to our call for six ways to cut gas prices forever.--Colin Mathews

Source: BBC NEWS

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