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Why Oil Prices Will Drop BELOW $100/ Barrel in 2009

Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

Ashley Seager, at The Guardian, wondered if the UK would see the same housing decline and economic downturn as we've seen in the US, because of a credit crunch:

If you were of a nervous disposition, you might be thinking that judgment day is nigh for the British economy, after all the excess, easy money and booming house prices of recent years.

America looks like it is already in recession, one that threatens rapidly to become the biggest slump since the 1920s. The collapse a week ago of the country's fifth-largest investment bank, Bear Stearns, signalled that the crisis sweeping the world's credit markets had taken a decisive turn for the worse.

She ties in the availability of credit and a healthy housing sector with consumer spending:

For the housing market, much will depend on how far the Bank of England cuts interest rates. The City thinks rates will come down by 0.75 points or more by the end of this year. That is not much, because the Bank remains concerned about inflation from rising food and energy prices. It will provide some relief to homeowners on variable rates but may not make money any more available to new buyers.

This credit crunch is more about the availability of money than its price. If you accept that a fall in house prices is likely, the question becomes: then what? Will consumer spending, on which the economy has depended for years, also collapse? Quite possibly, although the Bank has argued for some time that the link between house prices and consumer spending is less clear than you may think.

This is something Bernanke has known for a year.  The Fed has aggressively eased in an attempt to get the banks lending money again.  Critics suggest that his actions are inflationary:

Chairman Bernanke has aggressively cut rates in a Herculean effort to counter the credit crisis and the likely recession that it could engender. However, every time he cuts rates, inflation becomes more of a problem and the U.S. dollar depreciates further. This is a de facto tax on people holding and spending dollars. Fed policy should be a balancing act between restraining inflation and maintaining conditions favorable for sustainable economic growth. However, Bernanke’s actions of late have been anything but balanced.

What the critic misses is that Bernanke understands that the inflationary pressures are temporary.  The World is catching the cold our economy has now which will demand decisive action from their Central banks.  Look at the headlines from Bloomberg, this morning:

U.K. Consumer Confidence Drops to Lowest Level Since Thatcher Quit in 1990 U.K. consumer confidence dropped in May to the lowest level since Margaret Thatcher was ousted from office in 1990, as people became more pessimistic that the economy will slip into a recession, GfK NOP Ltd. said.

German Retail Sales Unexpectedly Fall for Second Month on Faster Inflation Retail sales in Germany, Europe's largest economy, unexpectedly dropped for a second consecutive month in April as faster inflation left consumers with less money.

European Inflation Rate Increases More Than Forecast to 3.6% as Oil Surges European inflation accelerated faster than economists forecast this month as oil prices jumped to a record, adding to what European Central Bank President Jean-Claude Trichet has called policy makers' ``biggest challenge.''

Canada's Economy Unexpectedly Shrank Last Quarter as Auto Exports Declined Canada's economy unexpectedly shrank in the first quarter, dragged down by lower automobile exports, giving the Bank of Canada more reason to cut borrowing costs again next month.

Swedish GDP Growth Slowed to 2.2% in First Quarter on Exports, Investments Sweden's economy grew at the slowest pace in four years in the first quarter as the global credit freeze curbed investment and shackled overseas demand for the nation's exports.

India's Economic Growth Holds as Weakest Pace Since 2005 as Spending Slows India's economic growth held at the weakest pace since 2005 as the highest interest rates in six years discouraged consumer spending and investment.

At the center of the inflationary pressures is oil (and other commodities).  As worldwide demand for oil decreases, the price will naturally decline.  Foreign central banks are forced to ease their monetary policies, in lock step with The Fed, to compete in the global marketplace.

In the end, the American consumer controls world monetary policy and the price of oil; the American consumer is sick.  Don't despair!  The World is starting to catch on to what's happening.  Expect lower oil prices next year.


Lisa Hill
Florida Property Experts - Daytona Beach, FL
Daytona Beach Real Estate

I'm going to hope and pray that you're right. We desperately need to catch a break from somewhere... Anywhere! Just give us a break.

May 30, 2008 06:10 AM
Fran Gaspari
Patriot Land Transfer, Inc. - Limerick, PA
"The Title Man" - Title Insurance - PA & NJ


When all those oil barons get used to the cash flow, and that flow slows down, you'll see what competition is all about!!! Nice post! Thanks,   Fran

May 30, 2008 09:03 AM
William Johnson
Retired - La Jolla, CA

Brian, Once they have had a taste of those high prices, much like wild animals that know what blood tastes like, they will seek it our at every occasion. There is no un-ringing that bell. The hundred and thirty something is the new benchmark all will seek. Then exceed it.



May 30, 2008 04:20 PM
Brian Brady
Matthews Capital Markets - Tampa, FL

Once they have had a taste of those high prices, much like wild animals that know what blood tastes like, they will seek it our at every occasion.

They said that in the late 70's, William.  The recession of 1980-82, combined with tight monetary policy, broke the back of those wild animals and tamed them for 25 years.  The difference between the Volcker tight monetary policy and today is that we are in a credit crunch (which is acting as tight monetary policy on the consumer side).

We're talking about conservation and exploration like we did in the late 70s.  Oil above $80/barrel is high (adjusted for inflation).  Drastic lifestyle shifts could drop the demand.

May 30, 2008 05:22 PM
Dave Woodson
Dave Woodson - Chesterton, IN
Not the Average Agent

That will be nice I heard the other day that what little we have changed our driving habits has had an affect on prices.  Maybe, that is just wishful thinking

May 31, 2008 05:38 AM
Bryan Flynn
Regency Mortgage Corporation - Worcester, MA
Central Mass and Worcester Mortgages

Brian, I do agree and I think you will be right with lower prices


-Bryan Flynn

Jun 01, 2008 02:27 PM
James Graner
Residential Services: http://appraisalmo.com - Saint Charles, MO

I hope it does, Congress sure is not interested in helping with that goal.

Jun 27, 2008 07:58 AM
Keith Webb
Guardant Investments, Inc. - Fullerton, CA

History does have a habit of repeating itself.  I think your analysis is right on the bulls-eye.  America does drive the world economy.  As long as the new administration does not tax the American Business and taxpayer heavily in the next 4 years funding social programs, America will lead the way to prosperity.

Jun 27, 2008 10:12 AM
James Graner
Residential Services: http://appraisalmo.com - Saint Charles, MO

Nailed it, great job and reading history and the market. Now we need a break on the credit crunch.

Jan 23, 2009 05:53 AM
Brian Brady
Matthews Capital Markets - Tampa, FL

Thanks, James.  I had no idea we'd see $40 this fast, though

Jan 23, 2009 03:31 PM