Fall In Oil Prices

December 23, 2018
capital market

The most traded and valuable commodity in the world is crude oil. The oil prices impact the global and U.S. economy. Each citizen is affected with an influence on spending patterns, affecting of investment decisions, and slowing of the nation’s economy. There is no doubt at all that the falling oil prices expose the economy’s financial imbalance.

Customer impact:

The common view that prices of oil in the US were stable caught almost all investors, consumers and economists by surprise during the last US recession. A fall in gasoline prices in the US is viewed as a cut in taxes. Lower oil prices mean more money to the customers and less to the oil companies and oil producers. One man’s gain is truly another’s loss in the game of oil prices. And there is no common ground to even it out!

Recent research found that the continuous fall in oil- prices over a few months increased the consumer buying and spending patterns to a whopping 125 billion dollars on other items like clothing, eating in restaurants etc. in the next fiscal year. That is startling since the US economy is bolstered 75% by customer spending.

Impact on oil producers:

Looking at the other side of the coin, a large number of employment opportunities created by the expansion of industries in oil production and exploration in the US, over the last decade, seems to be hanging by a thread. The exploration and oil industry will have to close down when such areas become unviable, and a sizable population will be rendered jobless and unemployed.

The tethering on the brink of a disaster is clearly indicated in the slipping bond and stock prices of oil production and exploration companies. The high yielding market for junk bonds where the oil companies in oil production and exploration hold sway with about 20% of the issued bonds, are rapidly reaching critical levels. This does not augur well for the domestic oil industry that appears to be in the throes of a crisis with no saving grace on the horizon.

Global impact:

Global finance is another impacted area. Currently, all oil is transacted and priced in U.S. dollars. Irrespective of who is selling and who is buying, the prices and transactions have been and continue to be in US dollars. For various reasons, the US dollar prices have risen versus other currencies in the last few months. The net effect is that the US shows a net gain with it buying and importing a huge amount of 800 thousand barrels oil each day.

European and Japanese markets are sluggish and slow moving. The oil prices are linked to supply and demand indices. A quick fall in prices can only be read as economic recession and fall in demand somewhere globally, causing an imbalance in the supply-demand positions.

Conclusion:

The fall in oil prices is the customer’s delight. True. However, a slowing economy impacted by the oil crisis pushes the economy to the brink of collapse. The on-paper gains are very short-term and are bound to impact the US economy negatively in a large way. The cracks in the global balance of economies are showing widening cracks and the fall in prices will eventually result in pushing the prices of other items upwards. There really appears to be no way out of this spiraling disaster affecting the US economy badly in the coming year.

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