How will falling Oil Prices impact the Economy?

Gail Tverberg is a researcher on subjects related to energy and the economy and writes for OurFiniteWorld.com. Gail Tverberg raises an interesting question on the impact of falling Oil Prices on the growth of the economy. With popular perception being that the significant decline in oil prices will bring about a positive change in the growth of the economy but is that likely? Gail lays out the reasons as to why this might not be the case with the following reasons:

Reasons

1. Oil producers can’t really produce oil for $30 per barrel.

2. Oil producers really need prices that are higher than the technical extraction costs, making the situation even worse.

3. When oil prices drop very low, producers generally don’t stop producing.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Source:Why oil under $30 per barrel is a major problem