The price of oil has dropped in just a few weeks from over $85 a barrel to just over $71 today. That has caused some perma-bulls on Wall Street to claim that a falling oil price amounts to a tax cut for consumers and is the result of a rising U.S. dollar, which will help bring the economy out of its malaise.
There are two reasons why a declining price of oil would be caused by positive forces. The first is a huge increase the supply of oil and the second is a rising U.S. dollar. Now, it would be hard to argue there has recently been a tremendous increase in the supply of the commodity, especially while BP is busy emptying a good chunk of oil into the Gulf of Mexico. So you can forget about the first reason being an acceptable explanation for its price drop. Therefore, it must be the rising U.S. dollar...correct? After all, it has risen from 74 on the DXY in December to over 88 this morning.
But in truth, the USD hasn't increased in intrinsic value at all. How can I say that? Well, there has been no change in interest rates and the supply of dollars continues to grow as evidenced by the Fed's balance sheet. The proof of the dollar's stagnation can be found in the price of gold. When measuring the dollar against real money it has risen from $1,120 per ounce to over $1,234 in the past 6 months alone.
The truth is that the fall in oil is a direct result of the upcoming significant slowdown in global GDP. Just look at the price of copper recently, which has plummeted to $2.77 lb from over $3.50 lb in recent weeks. The price of commodities has collapsed because the odds of a double-dip recession are great. That cannot be spun into being good news for consumers. And the USD has only increased in value if measured against other fiat currencies. It continues to lose ground against gold.
The increasing supply of dollars is not enough to overcome the anticipated decline in demand for these commodities. Therefore, the global recession will likely be severe, as it has caused base metals and energy to decline despite the fact that the dollar is actually losing its purchasing power.
The S&P 500 is down to 1,061 as of this morning and is corroborating the double-dip recession scenario.