Cheaper Oil Means a Boost For Economies Worldwide – Right??

Not Necessarily


The precipitous drop in the price of oil, 40% since June, could translate into greater consumption when consumers spend the extra money saved at the gas tank. That is one possibility. The other is that with inflation so low, consumers are in a static mode and may simply pocket the money. If monetary policy of keeping interest rates historically low to boost consumption hasn’t worked, why would cheaper oil?


Mario Draghi, chairman of the European Central Bank, warns that lower oil prices may become “imbedded” as European countries fulfill more and more of their energy needs from renewable sources. Once that transition is made there will be no return to a dirty and unreliable fossil fuel.


As the world increasingly responds to the economic, political, and social consequences of carbon caused warming, oil will be phased out at every opportunity. At the very least, there will be support for discontinuing government subsidies to the oil companies. An industry whose price is cratering for lack of demand and oversupply cannot justify the need for taxpayer dollars. This will be a harder sell in the U. S. where oil barons like the Koch Brothers control so much of the political process.


In Russia, where oil is 75% of the entire economy, the ruble has plummeted along with oil prices. It will be interesting to see how Mr. Putin, who has orchestrated his government control by controlling oil, weathers this politically.


China, where the governing regime controls the oil price, will not see any consumer related benefit. They are exposed to default on loans they have made to oil exporting countries like Venezuela, however. China is also under extreme pressure from their population to address the enormous air pollution problem resulting from the burning of fossil fuels so they are another country where lower oil prices might become embedded.


As Chris Giles warns in today’s (12/17/2014) Financial Times; “There is no guarantee cheap oil will cast the magic spell it always has in the past”.