The Downside of Low Oil Prices
As the global glut of crude oil keeps petroleum-based products at record low prices compared to recent years consumers in general could not be happier with the low prices at the gasoline pumps. Not only do consumers benefit from cheap gasoline, there are a number of advantages generated for the economy from this condition:
- Eating out – a loosened budget allows for taking the family out to restaurants
- Travel – taking a trip that has been out of the question with higher gasoline prices and concerns from recessionary conditions
- Investments – unplanned income can be utilized for investing
- Savings – put money aside for future needs such as a college education
- Luxury items – purchasing that new vehicle that has been put off for some time
Each of these possibilities has a positive impact on the economy through the benefits to other markets such as retail, hospitality, automotive, and more.
Are There Down Sides to Low Oil Prices?
As oil-producing companies find lower demand for their products and sharply reduced prices for crude oil and related manufacturing, profits drop accordingly. Although many consumers yield little sympathy for sliding oil company profits, there are ripple effects throughout the global economy:
Oil companies have out of necessity cut in excess of 200,000 jobs in just the last 14 months. Lower demand in turn means less need for exploration and drilling activities. These are typically high-paying jobs that disappear from the global economy. With increased oil production in the US even that market feels the impact of reduced demand, not only Middle East and OPEC nations that felt the brunt of low demand in past years.
In the US alone the number of active oil rigs fell approximately 50% with an impact of $70 billion in oil company investment.
Negative impact to oil-producing corporations has actually more than offset the positive gain for consumers as the duration of this condition continues into 2016.
Economists have warned that such a downturn in oil and energy company profits could trigger a period of recession, through the consequence of a significant financial drag on those markets. If consumers put credence to these warnings the impact could well be that their extra available capital is simply put away for the future, offering no benefit to the economy. In fact, some economists believe that consumers have reaped a savings of $120 billion since the mid-2014 drop in oil prices, with very little of that windfall circulating back into the economy.
Part of the lack of increase in consumer spending is attributed to fears that recessionary conditions may return or that today’s decreasing unemployment could experience a reversal creating a need for those funds.
How Do Low Oil Prices Impact Day Traders?
Tracking and monitoring fallout to other markets can provide day traders with potentially profitable trade signals. Being aware of cross-industry impacts from low oil prices presents the vigilant trader with opportunities to realize gains in markets that profit from these continuing economic conditions.
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