It doesn't require a rocket scientist to explain in simple terms that falling oil prices translate into lower prices at the pump, and a simple calculator will easily demonstrate that lower fuel prices equate to lower production costs on the farm—not only input costs but the cost of transporting the crop to market.
So for farmers and ranchers, one might think that oil prices dropping, almost daily, is a positive development. By the same logic then, lower crude oil prices should benefit other sectors of the economy as well.
For example, analysts suggest consumers could save as much as $700 a year in fuel costs for each vehicle they own. Likewise, manufacturing that requires oil related energy or by-products should realize a savings. The transportation industry, including planes, trains and delivery vehicles should save money.
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With all these savings and lower costs for consumers, business and industry, it seems reasonable to assume the prices of goods and services should soon be falling to reflect those savings. This could result in big savings for the average consumer, which could translate into more spending that could benefit the overall economy.
A more realistic estimate of what lower oil prices will mean to the average consumer and to businesses in general probably depends a lot on where you live and in what kind of work and the type of business or industry you are engaged. Many fear that the U.S. economy will eventually suffer if oil prices continue to plunge; others will view the lower cost of gasoline, diesel and heating fuel as a positive development.
In truth, the development has both good and bad aspects.
Those who fear a negative outcome of the falling price of crude say a deeper look into the issue leans toward a troubling time for the economy, especially if oil prices continue to fall. They say high crude prices in recent years sparked domestic oil production. Tens of thousands of U.S. workers are now gainfully employed in the growing hydraulic fracturing industry, or shale fracturing exploration, at sites all across the nation. In the process, domestic oil production has increased and provided relief from foreign oil dependence.
One of the results of such domestic production is the pressure it caused for oil producers in the Middle East. As more of U.S. demand was being met by domestic production, which analysts say could be produced for about $50 to $55 a barrel last year, demand for foreign oil that was selling for as much as $147 a barrel in 2008 and has remained greater than $100 a barrel ever since declined.
But the crunch comes in the realization that crude oil is produced for an estimated $10 to $20 a barrel in parts of the Middle East, and when OPEC leaders failed to curb production in their last meeting, it was a good indication that they were feeling the power shift. U.S. oil producers warn and federal officials are worried that the current situation could spark a form of an international oil price war, one that OPEC can weather over time by selling oil for less than it can be produced domestically.
The end result could be a significant setback for the U.S. economy. Domestic production could slow and falter. Tens of thousand of workers could be temporarily laid off, and domestic spending could drop as a result.
Already Wall Street is reeling as investors tighten their belts over weak market spending and uncertainties, a development that will undoubtedly cross over into other industries if stocks continue to trend downward.
A recent analysis of the negative effects of falling oil prices indicates a potential rocky road ahead for multiple sectors of the U.S. economy. Environmentalists fear lower oil prices will slow alternative fuel development and newer and more efficient forms of energy development. Energy dependent agriculture could benefit but also feel the crunch of lower oil prices. Fuel and production costs drop, but energy crop demand will falter if low crude prices continue to fall or remain low for an extended period. Needless to say, it would be a big blow to the fledging ethanol industry.
On the up side, the automobile industry could benefit as consumers opt for new vehicles now that fuel prices are lower and domestic travel should be on the rise as a result. On the opposite side of the coin, don't expect to see lower air fares in the near future. Airlines have been enjoying high profits since last summer and aren't ready to drop profit margins, at least not anytime soon.
State governments could suffer under lower oil prices, especially oil dependent states like Texas. Other states could benefit as consumers buy more gas, meaning more state gas taxes in the coffers.
The issue promises to offer more angles than a funhouse full of mirrors, according to analysts. The global economy could suffer, or under the right circumstances could adjust and flourish, depending on whom you ask. But most agree that a sluggish global economy means fewer markets for U.S. goods, and that could spell trouble for the manufacturing and agriculture sectors.
The outcome of the lower oil price dilemma may ultimately lie with U.S. consumers and U.S. business and industry. If fear over the economy spikes like it did in 2008-2009, we could all be in for a rocky ride. But if consumers, business and industry adjust and maintain a degree of economic optimism over the positive factors involved in the crisis, it could prove to be a time of moderate growth.