As I noted last month, once the oil price hit $40 per barrel, it was already below a ten-year low when adjusted for inflation. While still above the very-low prices of the 1990s in real terms, the oil price is in the midst of its biggest collapse since 2009. In real dollars, here’s the oil price at $40:
But oil’s decline didn’t stop there. This afternoon, the oil price dropped to 31 dollars per barrel, which puts it down at 2004 prices (in current dollars). It had bottomed out around 32 dollars per barrel in 2009 during the economic trough of that financial crisis. This graph shows the weekly price as of last Friday: 
So is this all due only to a weakening economy? Not necessarily.
Market fundamentals are a big part of it. Much of the glut we’re now seeing in oil is due to what happened when the Fed’s easy money policies made it easy to pour money into the “next big thing” which, in the wake of the last financial crisis, was the oil industry. As hedge funds and other early recipients of the Fed’s newly created money looked for a place to put it, the money was pumped into oil fields while jobs and equipment purchases massively expanded.
But — as evidenced by the Fed’s refusal to raise rates — the economy never was strong enough to keep demand expanded to match the new supply. This became even more true as the Saudis began to pump more oil for geopolitical reasons.
Economics is always interesting, though, because there is never one single explanation for anything. There are too many variables.
Another factor, as noted today at MarketWatch, is that the dollar is strengthening. As much as the Fed has been wed to a policy of hyper-easy money since 2009, the Fed looks almost restrained compared to the European Central Bank and the Chinese central bank. In fact, when it looked like the Fed was finally about to raise rates, the Chinese sought to distance the yuan from the dollar.
ECD chief Mario Draghi’s commitment to easy money is well established, but in addition to his,China has been on an inflationary binge for years, and now that it has managed to get assurances from the IMF that it will be bailed out in case of emergency, China has continued to allow greater flexibility for the yuan to float (somewhat) in relation to foreign currencies, which has exposed more of the true relative value of the yuan. Moreover, with a weakening Chinese economy — according to the Keynesian way of thinking — the last thing China needs is a strong currency.
Thus, with a weakening yuan and an ECB willing to “do whatever it takes” (i.e., print endless amounts of money) to keep the Euro bubbles going, the dollars looks comparatively like a safe haven. And thus, oil gets cheaper when measured in dollars.
But the fact that the dollar is relatively less bad doesn’t mean we haven’t already progressed into the later dangerous stages of asset price inflation as described by Brendan Brown. Indeed, we may already be moving past it.
Meanwhile, in the US, the deflating oil bubble is starting to make itself felt in other sectors of the economy as housing prices start to fall in oil-rich regions.
