The global economy is slowing and the is primary focus of the Federal Reserve and central banks worldwide (FED, 2016). This recession is marked by lower than expected inflation rates and declining corporate earnings (WSJ, 2016). It is a key concern of the FED as the United States raises interest rates above zero for the first time after the 2008/2009 financial crisis. If successful, the United States will be the first country since the crisis to maintain above zero interest rates. Many European countries and Japan are using negative interest rates as expansionary policy to counter severe recession.
One key factor in the recession is the decreasing oil prices. This change is most attributed to the United States, one of the largest markets in the oil industry, increasing domestic drilling after the significant inflation in oil and gas prices in the early 2000s (WSJ, 2016). Domestic drilling significantly altered the supply side as American production began to employ horizontal drilling and hydraulic fracturing, “fracking.” This has given consumers an estimated $2.9 trillion tax reduction (WSJ, 2016).
This has broken a historic period of “Secular Stagnation” that has allowed large corporations and coalitions to control and demand peak oil prices since the Great Recession that led to the highest inflation adjusted prices in history. Oil prices have fallen nearly 70% since mid-2014, while demand has increased. U.S. earnings in the energy sector have fallen 76% in the S&P 500, this loss is not limited to the United States (WSJ, 2016). Normal price of $90 to $100 per barrel has fallen to $30 per barrel, lowest level since 2004 (NY Times, 2016). This is a major reversal, that the global economy is at risk of recession from falling oil prices to several years ago when rising prices were putting the economy at risk of recession. While oil prices are not expected to recover, it is likely that the market will reach a new balance.
Long-term, generational energy innovations and market changes are not unusual because energy is a staple resource even as technology, markets, and regulations evolve. These changes are pushing less ethical producers out of the market. Decommission of nearly 2/3rds of rigs and sharp cut in exploration in production and investment. Many companies have filed for bankruptcy and an estimated 250,000 employees have lost their jobs (NY Times, 2016). Sixty-eight oil projects worldwide have halted exploration reducing production by 2.9 million barrels daily.
The supply-side changes most significantly affect Saudi Arabia, Nigeria, and Algeria who have turned to a less economically and political China as an alternative market to the United States (NY Times, 2016). Their economies and impact on the world economy are dramatically affected by this change, increasing the risk of more serious national economic recession and crisis. In addition, Iranian sanctions have been lifted because of agreements in 2015 allowing Iran access to Western equipment and technology. Many expect that access to new technology will make Iran a significant supplier of oil in the global market.
In the future, U. S. might be under more pressure to reduce production politically and socially, hydraulic fracturing, “fracking,” is very controversial because of the increased environmental risk. Many U.S. environmentalists and politicians are concerned and opposed to fracking. Assuming some risk of local off-shore drilling for domestic oil supply might be an ethical and economic responsibility. Shale oil is accessible in many sites globally and domestic drilling allows for lower entry barriers for smaller companies.
The reduction in oil prices might be more accurately seen as a long-term market adjustment as analysts report that the drilling can supply this amount of oil for centuries. Long-term shifts will be seen in attrition in both domestic and foreign suppliers as supply changes, political influences form policy, and environmentalism is applied to supply side processes.
A key economic concern is the domestic and foreign energy bond market. The long-term yields on bonds issued at peak oil prices are key factor in economic underperformance. In the United States alone energy companies are 15% of the non-investment grade bond market (WSJ, 2016). In addition, many companies are liable to significant loans issued at peak oil prices several years ago and regulated by new rules from the Dodd Frank Act that make error or disguising these liabilities much less possible.