As the S&P 500 has dropped more than 20% in the first half alone putting us well into a bear market, inflation is at a 40 year high, consumer sentiment is dropping, and the Fed is trying to fix things by hiking interest rates and maybe sending us into a recession, now is probably a good time to examine what sky-high oil will do if the economy turns south.

Dhaval Joshi, chief strategist for BCA Research’s Counterpoint, says he believes oil will lose more than 50% of its value, dropping to $53. He is making the case that what he is referring to as “the everything selloff” of 2022, is curiously similar to a period in 1981, when as with Ukraine and Russia, Iraq and Iran were at war. He points out the economy was also slumping, inflation was an issue, and the Fed was raising interest rates aggressively to try and bring it under control.

He then goes on to demonstrate that in every recession, oil prices collapse. Even in the 1970’s, when stagflation had prices rising as the economy floundered, oil prices dropped 25% in 1974. He notes the collapses are particularly dramatic when the price has risen excessively, and is responsible for hiking inflation and cooling the economy.

During the slowdown of 1974, oil dropped 25%. In the recession of 1981-82, it dropped 30%. During the 1990-91 recession it dropped 60%. the bursting dotcom bubble of 2000-2001 saw a 55% drop. In the banking crisis of 2008, it dropped 75%, in 2015 it dropped 60%, and in 2020 it dropped 75%.

Joshi applies the median decline in oil price of the last six recessions, roughly 60% to oil’s most recent peak of about $130, and calculates that as this recession kicks in, we can expect oil will most likely drop down to $53.

HIs suggestion is now may be the time to begin shorting oil, and to avoid energy stocks for the time being.

OPEC+ will be meeting again by videoconference starting at 7:30 a.m. Eastern.