It is no surprise that new
technology of hydraulic fracturing and horizontal drilling has increased oil and
natural gas production. This technology has shocked the market resulting in a
40% price decrease. At the end of this week, oil has dropped to an average of
$57 a barrel while the national average of gasoline has dropped to $2.60 per
gallon. Despite major controversy, the decrease in prices is bettering the U.S.
economy through many facets. Over the
last five years, the economy has consistently been at a 2% growth rate per year
while this year we are at 3%.
The
international Energy Agency’s 2015 forecast shows a reduction in demand growth
of 900,000 barrels a day to the previously projection of 1.1 million barrels a
day globally. Moreover, the U.S. production predicts to grow to 685,000 barrels
a day next year. What does all this mean for the future? Well, since 2011, the
U.S. dollar has appreciated by over 20% meanwhile gold and oil has fallen 40%
in the past 6 months. The dollar is the world’s reserve currency therefore commodities
are priced in dollars; the dollar causes lower commodity prices. This occurred
in the 1980’s and 1990’s but when the dollar collapsed in the 2000’s, gold and
oil skyrocketed. Today, commodity prices are falling while the purchasing power
of the dollar is increasing. With inflation being low, this means the money in
your pocket can purchase a lot more in the open market.
A problem
being talked about today is due to the Fed adopting a 2% inflation target. Many
believe this is a problem because it will double prices as generations pass. Paul
Volcker, the greatest American central banker argued the adoption by the Fed because
our job today is to maintain the dollar’s stability. The ultimate goal is to keep oil prices down
and keep the dollar where it’s at today, which will help grow the economy in a
positive direction.
Do you think the Fed is conducting the correct policy or is
Volcker right in terms of creating inflation?
Oil prices decreasing is also not a very good sign for US oil companies. OPEC has recently been cutting their price of oil in order to try and drive out some of these smaller US oil companies. Since they have very large reserves of capital they can afford to operate at a loss for a time while the US companies go bankrupt. I don't think these low prices will last and without proper legislation we could also see a decline in US oil production.
ReplyDeleteRight now, the extremely low oil prices are very convenient, but I worry we will pay for it in the future. Once the smaller companies are driven out of business, will OPEC drastically increase prices to make up for operating at a loss for an extended period of time. We would then have another oil shock similar to those in the 70’s, where production costs blow up and suddenly there is high inflation, much higher than the 2% some are worried about right now according to the article.
ReplyDeleteThis is a great thing for the economy right now. With economisist predicting an economic slow down in the future, dropping oil prices could be just the thing the help fuel growth. A drop in oil prices also helps the entire economy. It lowers transportation costs and gives consumers more income to spend elsewhere since gas is so cheap. Hopefully prices stabilize at these low levels to help the U.S economy continue to grow.
ReplyDeleteThe decrease in oil prices, although is loved by the daily consumer, might actually turn out to be a major problem for the smaller US oil companies. I agree that OPEC will try to drive these companies out of the market, and again have slight monopoly in the US oil market, on which US economy depends a lot. If the small US companies do go out of the market, a lot of people will lose their jobs which will in turn create problems of unemployment. However, all that being said, I believe that for the time being, this fall in oil prices will benefit an average US consumer, especially the senior citizens and college students, a lot as even a small amount of money in the savings will benefit them in the future.
ReplyDeleteIt's nice to see that oil prices are falling because it will be nice and cheap for me to commute this summer, but I'd almost rather have them be higher. With oil prices so low the average consumer does have more confidence, and this is boosting the economy, but the stock market is not as fortunate. Recently the stock market has taken a huge hit, and at the same time U.S. oil companies are being "crowded out" per se by OPEC countries. If the OPEC countries continue to try and drive out their U.S. competition we could see some huge macroeconomic problems soon.
ReplyDelete