The economic impact of lower oil prices | tutor2u Economics

Oversupply and excess stockpiles of oil is causing the price of oil to tumble, and leading to calls from OPEC for non-OPEC members to cooperate in order to maintain a higher oil price. Clearly this suggests that oil producers are losing out, but who else loses, and are there any winners?

Some advantages:

  • Cheaper oil should reduce production costs for firms, causing an increase in short-run aggregate supply therefore leading to an increase in GDP
  • Lower oil prices should encourage oil producers to improve efficiency as their revenues fall (because oil has price inelastic demand, so a fall in its price will lead to a fall in the revenue for oil producers)
  • Lower oil prices might undermine the power of OPEC, which operates as a cartel in the oil industry
  • Oil importing countries such as China, Germany, the UK, Spain and India have fared well in the IMF's recent growth outlook reports

Some disadvantages:

  • As the oil price falls, oil producers are less likely to look for alternative sources of oil (potentially causing "peak oil" to occur earlier than it would otherwise) and are less likely to invest in expensive alternative green technologies
  • As oil producers seek greater efficiencies, they will cut wages and jobs, causing unemployment to rise - this also has a strong negative multiplier effect in towns and regions that rely on the oil industry as the major employer
  • Large strains on the public finances of economies that are net oil exporters (e.g. Nigeria, Russia, Brazil, Saudi Arabia) - most of their tax revenue comes from oil, and as oil revenues fall, so too does tax revenue - these countries are having to engage in hefty austerity measures to maintain investor confidence
  • Low oil revenues are making it really difficult for oil companies to "service their debt", which really built up following the 2008 financial crisis when investors flocked to buy corporate debt from companies, such as oil companies, that seemed less risky; this is worsened by more general concerns over the future of the oil industry, as people are driving less and buying more fuel-efficient cars

There is a decent analysis of the impact of lower oil prices on the economy of Saudi Arabia in this report from al-Jazeera:

There's also this (shorter) analysis, also from al-Jazeera, of the impact of lower oil prices on Texas:

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