Why is dropping oil price bad?

[Pelafina]

Can someone explain why the media says that a low or dropping oil price is bad for the economy? Aren't low prices good for the consumer? And everyone is a consumer of energy.

[shirgall]

Can someone explain why the media says that a low or dropping oil price is bad for the economy? Aren't low prices good for the consumer? And everyone is a consumer of energy.

 

The first order hit is that it undermines the profitability of US-dominated natural gas and fracking, which were a significant boon for lowering the trade deficit. If we shut down US operations because they are unprofitable, it's a hit to employment, and also to resiliency as it takes many months, if not years, to restart such operations.

 

The second order hit is that a lot of nations that lend the US money have minimum oil price levels to keep their own economies going. All the middle eastern countries that invest heavily in the US are now operating with budget shortfalls.

 

The third order hit is that our normal method of smoothing the impact of oil price volatility is the oil reserve... which is very close to full, so we can't use it to increase demand.

 

However, the final effect, the one with the most telling impact, is that the sanctions against Iran are due to fall, and they want to sell oil, too. We may yet see a shooting war between them and Saudi Arabia. War, being uncertain, adds an incredible amount of risk to all sorts of things in the market.

[fezjones]

its bad because it blows up the left narrative that oil companies are greedy and conspiring with speculators to maintain high oil prices forever.  it also blows up the idea that rising prices are good, even though any consumer will tell you that lower gas prices are an economic boom to them.

[grithin]

Diminished speculation capacity on rising and potentially rising interests rates; Iran oil production; effort to undermine Russia; odd attempt by elitists to hide bad economy while raising the fed rate (which they new would cause suffering).  Plenty of possible and interacting reasons.

 

If you are not familiar with economics, a common tactic of large companies is to price so low that you kill competition and create a monopoly (after which the price rises).  You might even liken this to "good government" hahahahaha.

[Thomasio]

It's bad because it shows the entire world, there never was a real shortage in oil.

Prices have been kept up through the OPEC cartel, while those were almost the only producers.

Now that the US has converted from an oil importer to an exporter, where the US isn't member of the OPEC, not only does the OPEC without their American customers struggle to make money as they used to, there is no longer a control over the amount of oil produced, the only way to keep a share of the market is to bring up as much oil as possible and to underbid the competition in sales price, meaning there now is more oil on the market than the world economy needs.

Furthermore many countries, like Russia, Norway, Venezuela, etc., who depend on the money they make from exporting energy cannot simply cut their needs for money, meaning they try to compensate lower prices through higher production, which obviously cannot work, but drives prices further down.

 

This is the unavoidable outcome of a "free market" where the former cartel has lost its power.

This will unavoidably lead to the bankruptcy of almost all oil producers except of the ones with the cheapest cost of production, including transport to the customer.

Once this battle is over, some kind of cartel will be reestablished, production will be limited again, prices will be set higher again and everything returns to where it was before, until prices are again so high that alternative methods like fracking become attractive again, after which another round of this battle will begin.

This surely will have quite some impact on the takers at the top of the pyramid, but from a libertarian point of view one can only welcome this as a step in the right direction and for private customers it's indeed an economic boom, allowing them either to repay their private debt or buy other things.

But since the takers at the top of the pyramid still control most of the media, we now get to hear how bad this all is.

[Jer]

I think cheap oil is generally good for consumers. This vid notes potential problems

 

The first order hit is that it undermines the profitability of US-dominated natural gas and fracking, which were a significant boon for lowering the trade deficit. If we shut down US operations because they are unprofitable, it's a hit to employment, and also to resiliency as it takes many months, if not years, to restart such operations.

Trade deficit is another term I think is a lot less scary than Fox News would have us believe. When the US has a "trade deficit" with China what's actually happening is tangible goods are being manufactured and shipped to the US in exchange for increasingly plentiful US dollars. I think the party getting the real goods is not at a deficit...

[Alan C.]

Low prices are good because it results in a higher standard of living.

 

In a market econonmy (which we currently don't have) low prices would be a direct reflection of increased efficiency and production. An example of this can be seen in the computer industry where components continually improve while prices decline.

[st434u]

Low prices would be good if they were sustainable. They're not. This current crude oil price under $30 is completely artificial, and will not last. I suspect by the end of 2017 oil will be well above $80 at the very least. Much more if there's a dollar crisis, which is coming soon. By 2025, I would be surprised if oil doesn't hit $500 or more.

 

Volatility makes it harder for capitalists to efficiently plan the structure of production and allocate resources to productive investments. When businesses at large fail, the economy suffers.