Double-digit oil is a welcome sign, not a harbinger of deflationary doom. The decline of the price of a barrel of Brent crude to just below $100, down 13 percent from its June peak, is good disinflation. It will help consumer spending and global economic recovery.
High oil prices have been a harmful side effect of extraordinary monetary medicine. The U.S. Federal Reserve launched its second round of quantitative easing in November 2010. A matter of months later the oil price had risen by over 40 percent, and has averaged $110 a barrel since the beginning of 2011.
Speculative fervour, a weak dollar and talk of the lingering commodity super-cycle reinforced the market effects of monetary stimulus, as did lingering strong GDP growth in energy-intensive emerging markets. But oil prices have worked as an anti-stimulus. Expensive oil is one of the reasons global economic recovery has proven so difficult.
The amount British households spent on motor fuel, for example, jumped by 28 percent between 2009 and 2012. U.S. households’ expenditure on gasoline rose to $2,912 in 2012, or just under 4 percent of pretax income, according to International Energy Agency estimates, the most in almost three decades in real terms.
Now, however, the monetary forces which drove super-priced oil have gone into reverse. U.S. QE looks set to end in October. An index of the dollar’s value is at a 14-month high. And oil has company. The Thomson Reuters CRB commodity index is down by 22 percent on its 2011 highs. Part of the reason, it is true, is less optimism on emerging-economy growth. Expensive oil has hurt its customers everywhere.
It has also weakened demand and encouraged energy saving. The IEA thinks global crude demand will rise by just 1.2 percent this year and OECD industry stocks are at their highest for almost two years. Longer term, rising U.S. shale production is changing the global market.
That the oil price is falling in the midst of serious Middle Eastern unrest suggests there may be considerable further scope for downside. That would be good. Oil has weakened growth. Its weakening will help it.