The consequence of low oil prices
As someone who uses my parent’s car, it is safe to assume that I am familiar with the effect of oil prices in terms of my personal finances. It is always good news for someone like me to read in the news that prices of diesel or gasoline rolled back. Every driver know that 1 peso of roll or price hike is a world of difference. A roll back will save you a lot of money for other things, and the opposite goes for the price hikes when it increase, it gives you a very annoying feeling that your money could have gone somewhere rather than in your fuel consumption. Low oil prices in our context is also very beneficial, for higher oil prices in our eyes gives a lot of negative consequences. High prices of oil makes everything else expensive because our civilization relies on transportation in order to allocate and distribute goods and services. With high oil prices, we can see higher prices in food, water, electricity, furniture, and almost every product known to us. So with this in mind, it is easy to suggest that we must all strive to lower the price of this precious commodity in order for the whole economy to benefit from its decline. But as history shows, that is not such the case.
Consistent drop in oil price if continued will result in some new dynamic of global economy. Ever since the industrial revolution barring some short patches of time there has been no uncertainity on the oil demand and the economy was more or less driven by the extrapolation. This has been kind of auto pilot scenario as most of the journey has been without major hiccups. But now with the added scenarios of shale oil supply and the largest importer of oil -USA cease to be so anymore, another largst consumer China in slowdown mode, add to the fact that Iran, one of the top oil producer that was out of market due to embargo is all set to become active exporter soon, the global economy is badly nudged to spring out some new mode of economic vibration. Its just a matter of time. Only worry is that it should be complementing the existing economic set up and is not paradigm shift in any adverse manner. The oil price fall in March 2020 has pushed oil to its lowest prices for many years. The above graph shows nominal prices and not adjusted for inflation.
Usually, a fall in oil prices would be greeted by consumers and firms due to the lower prices and costs. However, this fall is due to expectations of a sharp drop in travel and economic recession from the coronavirus. Therefore, there is little expectation that the lower oil prices will have any positive economic effect. If people cut back on travel, cheaper petrol doesn’t make much difference. If people see a fall in income because they are out of work, cheaper oil prices are only a small compensation.
For oil exporters, a fall in oil price is damaging to the economy. Many oil-exporting countries rely on tax revenue from oil production to fund government spending. For example, Russia gains 70% of all tax revenues from oil and gas. Falling oil prices will lead to a government budget deficit, and will require either higher taxes or government spending cuts. Other oil exporters like Venezuela have relied in the past on oil revenues to fund generous social spending. A fall in oil prices could lead to a significant budget deficit and social problems.
Other oil exporters, such as Saudi Arabia and UAE have built up substantial foreign currency reserves; they can afford temporary falls in oil prices because they have substantial reserves. Reduced profitability for alternative energy sources. In recent years, there has been an incentive to invest in renewable energy and electric cars. A prolonged fall in oil prices will reduce this incentive and encourage firms and consumers to stick with oil. Falling oil prices could delay investment into alternative ‘greener’ forms of energy, such as electric cars, and this could have negative consequences. Long-term falling oil prices could reverse the recent decline in-car use, leading to a steady increase in traffic congestion and environmental costs of petrol use.
