The decline of oil prices to less than $50 a barrel has an undeniably positive effect on the global economy. From the U.S. to China, people are driving more and spending more, a much needed economic boost in generally glum times.
But to investors, a too-low oil price can also be a sign of trouble. The price of oil has certainly dropped because of an increase in supply – specifically, OPEC’s refusal to cut production and the vast amount of shale oil and gas being pumped in the United States. But the price of oil is also a product of slowing economic growth and declining demand, especially from China, Japan and the Eurozone.
China, which is currently experiencing an economic slowdown, propelled roughly half of the annual world growth in oil demand over the last decade. “[T]he whole damn thing is driven by China. When the investment cycle turns down, everything goes down,” Andy Xie, a former economist for Morgan Stanley, told the Globe and Mail.
So what exactly is too low when it comes to oil prices? According to a recent survey of investors, the tipping point may be around $30.
Convergex, a brokerage house, recently surveyed 306 professional investors about what oil price would signal a global economic recession. Roughly a third of their respondents named a price of between $26 and $30.
Data: Convergex
The investors agreed that the drop in oil prices had been a net positive so far, but most felt that a continued fall would be dangerous for the U.S. economy. More than half of their respondents (55%) said that a continued drop in oil prices would have a negative or very negative impact on the U.S. labor market, presumably because of jobs lost in the energy sector. Just 32% predicated a positive or very positive effect from falling oil prices, and few of the respondents believed that oil prices had already hit a bottom.
Predictions are of limited use in any market; after all, few people predicted that oil prices would fall below $50 a barrel today. But the survey results suggest a threshold to watch for. Falling oil prices have so far provided a boost to economic growth, but that could change if they start to spook the market.