Saturday, May 15, 2010

Does Falling Oil Prices Suggest A Drop In Real Economic Growth?

This chart says yes!

For biased opinion writers, data mining facts to support their point of view is a common folly.

The chart above from the Casey Research, who I usually agree with except for this, reveals on such vulnerability.

Unfortunately, while correlation isn't necessarily causation, the correlation shown above isn't even persuasive enough to suggest of a meaningful causal effect.

There are four periods (in blue numbers) indicated to exhibit the so-called 'strong' correlation between falling oil prices which allegedly leads to falling GDP.

Unfortunately the first two (early and late 70s) shows falling real GDP ahead of falling oil prices. It's only in 2001 and 2008 where falling prices seemingly coincided with falling GDP.

Moreover, in nearly two decades, i.e. 1981-1998 (that's one heck of a long period!), the oil-real GDP correlation was entirely absent!

I am not saying that their implications won't happen.

If it does, it 's more because of many other factors, which makes the oil-GDP correlations more serendipitous than from actual cause and effect relations.

What I am saying is that the suggested correlation isn't only infallible, it is rather inconsistent to be relied on.

But this certainly makes for a good presentation.

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