Oil Collapses During Recessions and Also Falls in Support of Bull Markets
The subject of this month’s letter stems from the research behind and discussions at two Harvard Club events on oil debt and equity this past January in Boston and New York City. With a mix of people from corporate, investment, and academic backgrounds, we had a lively discussion around the falling price of oil and its implications for the debt and equity of oil firms and the markets in general.
It’s not obvious when one hears about oil prices falling, but it is obvious when viewing long-term charts of oil prices and business cycles: oil prices often fall at the beginning or middle of business cycles and bull markets. We saw this in the bull markets of the 1980s, 1990s, the market leading into the tech bubble of 2000, and in the bull market of 2002 to 2007. Oil fell during those periods, setting a foundation for growth and increased spending, and therefore economic growth and significant stock market rises. That is exactly what we’re seeing right now.
Oil prices do collapse during recessions. In 1982, 1990, 2001, and 2008, oil prices collapsed. Those were all recession years, and a recessionary fall in global demand for oil was the driver. That is not the situation now.