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Oil Prices Plunge: Why It’s Not Good for the Economy

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Earlier this year, oil prices soared to more than $100 a barrel again, bringing back memories of the oil price spike of 2007 and 2008.

That spike, which saw oil prices hit an all-time high of $147 a barrel, was primarily blamed on "speculators." But it also caused major sticker shock at the gas pump, changed the kind of cars Americans wanted to buy, and changed driving behavior.

In the global economic crash of 2008 and 2009, oil prices fell again, and everyone quickly forgot about the pain of the price spike.

Then, over the past couple of years, with the global economy recovering quickly, oil prices have crept back up, driving gas prices toward their previous highs. When oil finally cracked $100 again, the blame-game began anew, with most people targeting "speculators."

Although "speculators" are an easy target for many unpopular price moves, it should be no mystery what's really driving oil prices.

Supply and demand.

In the past couple of decades, the world has added about 3 billion new capitalists in China, India, and elsewhere, and the surging economies in these countries are driving up demand for a finite commodity. If oil prices didn't skyrocket under those conditions, we would have a real mystery on our hands. But they have.

When the global economy slows down sharply, meanwhile, the demand for oil drops, and prices decline.

According to Todd Harrison, the CEO of investing site Minyanville, that's exactly what's happening now. And that's why today's falling oil prices should not be greeted with jubilation--because they're merely an indication that the global economy is once again hurting.

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