Since the third quarter of 2015, oil prices have been bearish. Global oil and oil products have experienced massive drops in prices. The general psychology is high prices are bad and low prices are good. Is this true for all sectors of the economy that use oil? Why does this drop seem ineffective on global indices like S&P 500 which have experienced a continuous rise and appear to be unaffected by the trend?
History
Back then, the problem was attributed to weak demand as a result of a decline in the Chinese market, but since the rebound, oil prices have not gone back to what they previously were. The price of oil has ebbed and flowed, often erratically, over the years in response to geopolitical events and changes in supply and demand. As a result, equity markets suffered and took longer to recover.
Expected growth
The United States, a massive consumer of oil, hasn’t had proportional growth as a result of the drop in oil prices. The psychology of a fillip to growth as a result of decreases in global oil prices has not materialized. The clearest battle is predicting world oil price fluctuations because a movement can have an effect on the demand-supply equilibrium. Petrol prices at the bowser have dropped below the conceivable $1 per liter.
It can be argued that the benefits of low prices will appear after the markets have recovered from the slump. Conventional thinking, like what experts from Norwest energy suggest, is that a price drop will result in a netplus for the world economic players. It is expected that the major gainers will be importers because of their saving habits but is this truth?
Adverse effects
In a recent report from Toyota, their trademark hybrid, the Prius, has experienced a decline in sales for the first time since the flagship was introduced in 1997, the reasoning behind this being the consciousness to save on gasoline drops as the price drops. A shift towards more powerful vehicles is experienced as they are now within the manageable allowance of the public. This, however, means that retailers barely break even on their investment as they have to sell it at the base price or be saved by government regulation on prices.
There are no clear winners
The gains for this drop are double edged; as one gains, another loses on the other end. The stakeholders are the ones who experience the most turbulence. Airlines, for example, use less on fuel expenses and therefore push the same benefits to travelers. In the days past, this has seen a significant number of people opting for air travel, making other forms of transportation take the beating.
Similarly, as oil presents a reduction in energy costs for companies dependent on oil, it also presents a destabilization in the market forces of demand as supply for their product. Overproduction and a waste of resources cannot be shut out of the image. Petroleum producers will experience an oversubscription to their shares and their share price will drop.
The let’s wait and see what approach has been used to determine the gains from the low oil prices. With a clear winner being the consumers, we are left to see what governments and stakeholders will do to ensure all the sectors of the economy gain from it.
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