Wednesday, January 7, 2015

Oil Prices Down Again Yesterday ... How Favorably Will Low Oil Prices Our U.S. Economy?

After a 5% drop Monday, oil fell another 4%. U.S. crude futures closed at below $50 per barrel yesterday for the first time in six years. See Oil Hits New Lows.

This morning oil is up ~1% and the stock market futures are looking positive as well. But as Yogi Berra famously said, it ain't over 'til it's over, so stay tuned.

And speaking of the future, the recent dramatic decline in oil prices is resulting in predictions of another 20% drop in prices, or perhaps $40 per barrel, sometime soon. How's $1.50 per gallon of gasoline sound?

Of course, whether that $40 price per barrel of oil and $1.50 per gallon gasoline will actually become reality or not, nobody knows. That said, if it does happen, it will represent really good news for U.S. consumers and our economy in general. In fact, the new pricing in the oil patch is a sign of many good things ahead for our U.S. economy and consumers.

Oil Price Q&A: What the Plunge Means for Gas Prices, the Economy and Markets is optimistic about low oil prices and an improving U.S economy. Here's a brief 'edited' excerpt from the referenced article:

"Question: Under the most likely scenario of things to come, what are some midterm and long term effects of deflated oil prices for the U.S. economy?

The macroeconomic forecasting firm IHS Global Insight ran some scenarios for what the economy looks like if oil averages $40, $60 or $80 a barrel next year. You can see the results of the simulation here:

The bottom line is that lower prices boost GDP and consumer spending but lower overall inflation pretty dramatically. If prices are this low for the next year it will be a pretty big boost to consumers.

But if prices stay this low for years, it starts to change behaviors. When prices were high, people bought more fuel efficient cars and were less likely to move into the exurbs. If oil stays low these behaviors could reverse. People will again be driving longer in less efficient cars, and over time, some of this boost will fade as people simply buy more gas. In the long-run people will adjust."

Summing Up

Deflation is really happening in the oil patch, and it's a great thing to see.

Although the market's gyrations are a bit unsettling, this is a definite plus for the entire U.S. economy, most businesses and all U.S. consumers. It's also a genuine positive development for Europe, China and Japan as well.

Russia, Iran and Venezuela are the big losers, and Saudia Arabia holds the trump card with respect to deciding on reducing production and thereby stopping the free fall in oil prices. Whether and when they decide to play that trump card, we won't know until the time comes.

So for now, let's relax, stay calm and enjoy the benefits from these game changing lower energy prices.

And let's also hope that the stock market settles down and resumes its upward climb sometime soon, which I believe it will.

{NOTE: I'm not going to comment extensively on President Obama's political grandstanding by announcing yesterday that he will veto the construction of the Keystone Pipeline (See President Congeniality). That's simply another outstanding display of our sick politics in action. But that said, markets and freedom in the private sector will prevail --- eventually.}

At least that's my take.

Thanks. Bob.

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