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Adjusted for inflation, oil is now at levels seen two decades ago
Bloomberg News
Pumpjacks are seen south of Weyburn, Sask. on Sept. 7, 2021. Photo by BRANDON HARDER/ Regina Leader-Post
The world’s advanced economies might just have a new reason to hope for a firmer growth footing in the next year if some of the most bearish forecasts for oil hit the mark.
With global benchmark Brent crude falling below US$70 a barrel for the first time since late 2021 on Tuesday, a key component of the energy shock that drove the worst inflation crisis in a generation is already benign enough to give policymakers a green light for interest rate cuts.
But the prospect of a descent toward US$60 a barrel in 2025, raised by forecasters from Citigroup Inc. to JPMorgan Chase & Co., and echoed on Monday by one of the world’s largest commodities traders, could further bolster the chances of the United States and its peers weathering the effect of high borrowing costs without a damaging recession.
“The probability of pulling off a soft landing would increase — that applies to Europe as well as the U.S.,” said Tim Drayson, head of economics at Legal & General Investment Management Ltd. in London and a former United Kingdom Treasury official. “On balance, it would be a net positive for the world getting rates back down and helping central banks get back to neutral.”
For monetary institutions poised to cut rates this month, the recent decline in oil prices has already opened the door wider to easing. Officials at the European Central Bank are set to deliver a second rate reduction on Thursday, while the U.S. Federal Reserve is widely expected to start its own cycle of easing less than a week later.
The promise of US$60 oil — at least for those investors and policymakers who believe it — has the potential to further depress headline inflation rates and offer consumers a disposable-income boost. That’s a rare bright spot in a world fraught with risks ranging from possible trade wars to the worry of what a Chinese deflation spiral might do to global demand.
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