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Crude price drop augurs further economic decline

By Zhou Junsheng (Global Times)

08:13, June 28, 2012

The New York Mercantile Exchange (NYMEX) crude oil futures fell to $77.56 per barrel Friday, an eight and a half year low.

The recent drop in global crude oil prices has been greeted by many in China as a sign that fuel oil prices will soon begin tracking this trend and start creeping downward. Indeed, the National Development and Reform Commission (NDRC) slashed government-intervened prices on gasoline and diesel respectively on May 10 and June 9 in response to falling crude prices in the international market.

In addition to reducing the consumer price index, a lower price at the fuel pump would give individuals and companies a much-needed break on transportation and logistics costs. But contrary to what may seem like common sense to many, a slide in crude prices actually bodes poorly for the world economy as a whole and thus the livelihood of the nation's people.

Friday's crude oil slide came amid a host of disappointing news items from both China and abroad. Last Thursday, the US Federal Reserve failed to announce any new stimulus measures, which many in Wall Street and elsewhere had been expecting, and sharply dialed down its forecast for the country's future economic growth. Also, by the end of last week, initial claims for state unemployment benefits declined only marginally compared to previous weeks, according to US Labor Department data. Meanwhile, in the eurozone, the purchasing managers' index (PMI) for June declined for the fifth consecutive month. In China, June's PMI as calculated by HSBC retreated for the sixth straight month, hitting the lowest level of the year to date.

With the modern world economy heavily reliant on oil, crude prices are often viewed as a bellwether for the health of most international markets. A drop in crude prices likely signals an impending slump in economic activity around the world, which will undoubtedly further erode investor confidence. With sentiment souring, financial markets can expect to suffer soon, which will further weigh on what little faith investors still have, potentially sparking a vicious cycle.

While a drop in crude oil prices may reduce living expenses to some small extent for people in China, the cost of this minor gain will be much greater. What residents of the country can more likely expect with drops in crude prices are fewer investment and job opportunities and perhaps eventually even lower incomes. Faced with such a scenario, it may not be long before people look back with fondness on the days when it seemed that oil prices had no where to go but up.


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