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Thursday, April 14, 2016

What Happens if Oil Prices Rise?

The price of a barrel of oil is low by the standards of the recent past.  Over the last few years, the price has come down by roughly 60%.  This has translated to lower costs for consumers for gasoline, lower transportation costs for items moved by truck, a drop in jet fuel expenses for the airlines and many other savings across the economy.  In the past, such a major drop in costs would have led to major growth in the economy as companies and individuals spent or invested the savings garnered due to the oil price cut.  That economic growth has not materialized, however.  Most consumers have held onto the savings or used them to pay down debt.  Companies have benefited from the lower oil costs, but the slow economy has still led to a decline in overall corporate profits and only slow growth.  The positive effect from low oil prices is over, but there is now another question being presented.  Oil prices could easily rise from the current level by 50%.  Such a rise may have already started.  Indeed, the price rise in oil could be much larger than 50%.  If this happens, what will the effect on the US and world economy be?

Some people think that a price rise in oil will help the economy.  These people argue that a price rise will save some of the oil and gas companies that are now on very shaky ground and that this will help move the economy up.  That's just wrong.  The negative impact of higher prices would be much, much greater than any benefits gained by a few struggling oil companies.  How many people are going to see their expenses rise and take no action to cut back on purchases?  There will be some to be sure, but the majority will cut expenditures.  That cut will hurt sales to consumers and will slow the economy.

 

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