Crude oil prices and the energy sector as a whole may contribute to a recession soon, according to market experts. The national average price for a gallon of gas has skyrocketed of late with crude oil nearly doubling in price in the past year alone. Add in rampant inflation, global conflict, and decreased oil production both domestically and abroad, and you’ve got yourself a recipe for disaster.
At a glance
- Oil prices are rising at historically fast levels
- Russia will likely stop sharing its oil with the world as the war continues
- Oil prices are a sign post for general inflation issues, which will eventually trigger a recession
The correlation between spiking energy prices and recession economics does not necessarily always infer causation. That is to say, rising oil prices do not create recessions — those are baked into the cake due to fiat currencies and the Federal Reserve’s manipulation of interest rates. Simply put, recessions can not be avoided in this country’s current fiscal system. However, though oil prices do not necessarily cause the recessions, clever observers of history know that inflated energy prices almost always mean a recession either is underway or rapidly approaching.
For example, crude oil is up over 20 percent in the past one week alone. Such wild inflation in the sector has only happened four other times on record in the modern era; three of which were in recessions.
Furthermore, it’s hard to envision a scenario in which energy prices do not continue to soar. Rystad Energy, one of the top global energy sector consulting and research firms, expects a plunge in Russian oil exports of as much as 1 million barrels per day, which will hamper worldwide supply. Many portfolio analysts are now researching and advising clients to invest in energy funds as a way to hedge against the impending market strain.
Oil prices have long determined the advent of new recessions
One advisor, Nicholas Colas, co-founder of DataTrek Research, said he uses an old auto industry trick in determining investment strategies concerning oil.
“The rule of thumb I learned from auto industry economics in the 1990s is that if oil prices go up 100 percent in a one-year period, expect a recession,” he says. “We are getting there fast.”
A year ago, crude oil was $63.81 (March 4, 2021) a barrel. Double that, and you’re looking at the strike price for a recession, according to the strategy. Crude oil is currently at $115. And because prices continue to rise, gas is now more expensive on the way home than it was on the way to work, which means consumers have to increase demand so as not to get left behind because of inflation.
Have you ever studied a truly ravaged, inflated economy, like the one in Venezuela currently? Driven by social pressures to print unlimited money, governments create untenable economies in which cash literally loses value by the minute. As a result, consumers must spend money the second they earn it; otherwise, it loses value. In the U.S., oil will likely act as the precursor to this effect; but it will eventually spread to all markets. From there, recessions happen fast and furiously — everyone tightens the belt, slows spending, and tries to keep their money from becoming worthless.
And what’s the only way to (temporarily) avoid recessions in a fiat-based market? Growth and innovation. Unfortunately, growth will have a hard time competing with 100 percent market bounces.
“Can we grow if oil prices stay here at 100 percent?” Colas asked. “Recent history says no.”