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The Impact on the Economy: Oil Prices Dip Below $50 a Barrel

JessicaFender / Pixabay

It seems like a bygone era when fuel prices were this low. Oil dipped below $50/barrel for the first time in 10 years. Prices at the pump are the lowest in a decade which makes commuters and truckers thrilled, but what about the economy as a whole, and what can we expect in the New Year with depressed oil prices?

Well first things first, there is no conspiracy theory, if we follow Occam’s Razor, and in this case we should, then we should conclude that the cause of the recent decline is simply supply and demand economics. The world demand for oil is low, major economies like India and China are slowing, and as such the current supply is starting to accumulate. It doesn’t help matters that oil producing nations are not slowing production. OPEC is happy to continue pumping; Saudi Arabia has no interest in shutting off the pumps no matter how low oil goes.

So there are supply factors with major producers, but ultimately the reason why global prices for oil have declined, and declined so swiftly, is an issue of demand. No, it’s not to punish Russia, no it’s not to slow increases in US shale production.

Although those are secondary issues that are undoubtedly affected by the lower oil price (significantly I might add), world demand still wins the day.

So will this hurt or help the economy as a whole? Well lower oil prices actually means production costs for most sectors will decline, as well as heating and fuel costs for consumers. Overall, this should help spur economic growth.

However, major energy producers who rely on higher oil prices will be affected. Resource economies like Canada will face economic slowdown if the price does not rebound. The oil sands rich province of Alberta may cease to be a driving force behind the Canadian economy if production costs exceed per barrel prices, which at $50 they most certainly do. If prices remain where they are then these industries will see significant decline this year.

The balance will be to what degree will all the other industries, such as manufacturing, pick up the slack? Globally the opportunity to produce will be at an all-time high with lower energy costs coupled with the historic lows when it comes to borrowing funds.

2015 will shape up to be a year of correction, but to what degree remains to be seen.

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