Over the past few years, oil prices have been steadily declining. There are a few reasons for this, but most notably, economic demand around the world has been low and production is up. Many companies in the United States are using new technology to reach oil deep in the ground. This has several effects on the economy.
- More jobs in the oil industry
- Higher oil production
- Lower gasoline prices
- Lower product costs
- More pressure on the oil industry
Although low prices are a good thing for consumers and business, often this puts pressure on the oil companies themselves. There have been a lot of layoffs within the industry, and many people expect this trend to continue. This is a major shift in the oil market that is not going to go away overnight.
Benefits of low oil
As a consumer, there are several benefits of low oil prices. Anyone who has ever had a vehicle knows just how expensive gasoline can be. When demand for fuel is up, oil prices generally rise. With oil prices so low, drivers across the country are experiencing low oil prices and are able to save more money. This additional money is then used in different areas of the economy.
- Housing costs
Over time, this is a great thing for the economy, because businesses in these areas benefit from the extra spending that customers can now take on. However, there are also some pressures that low oil puts on companies around the country.
Many companies are now worried about what happens when the cost of fuel goes up. Will the customer pull back spending in order to compensate? Only time will tell, but one thing for certain is that the price of oil generally does not stay this low for long.
Oil drilling technology
One of the biggest reasons for the drop in oil prices is new oil drilling technology that is on the market today. There are a lot of companies investing in this technology because it allows them to extract oil out of the ground in a more efficient way. Over time, this can make a huge difference in overall oil production.
Oil prices are generally volatile. This is bad news for companies that are highly leveraged. The operating and upfront capital costs for these investments is very high. This means that the companies have to borrow millions of dollars just to keep the doors open. When fuel costs are high, they are able to make more money. However, when fuel prices drop, they have a lot of fixed debt expenses.
In the future, it is important for leaders in the economy to understand how important fuel prices are. With low gasoline prices, consumers have more discretionary income to spend in other areas. However, when oil prices are high, the oil companies benefit from higher profits. There is a balance that needs to be struck in the economy so that both sides come out ahead.