Oil's Collateral Damage
Here in America, we are able to enjoy relatively cheap gas prices thanks to supplementing domestically produced oil (both in the U.S. and Canada) with foreign oil. While many of us are celebrating the fact that we soon will - or already are - filling up our gas tanks for the same about of money we once spent over ten years ago, many are dreading this situation.
Cheap oil, and thereby cheap gasoline, does a few things: first it makes the consumer happy. Shoppers now find themselves with quite a substantial amount of extra money in their pockets at the end of the month and in turn decide to spend it. Not usually on anything huge, but far more discretionary purchases happen when consumers have extra money in their pockets - like gum, magazines, soda, chips, candy, cigarettes, and beer.
The next thing that happens is inflation tends to shrink, both at the producer and retail levels. Companies use less money to manufacture and ship the same amount of products, and thereby increase their profit margins. Products do not necessarily become cheaper for the consumer, but companies definitely pocket more dough from excess savings.
This all sounds great so far, right? Well the drop in oil has further reaching consequences than just the fact that it's cheaper to fuel your car and heat your house.
For one thing, many jobs in the U.S. are dependent upon the strength of the energy sector and being able to collect high prices for fuel. Whole economies, like North Dakota, which thrive on hydraulic fracking and offshore drilling majorly, suffer massive cutbacks until conditions improve. At a time when the economy is still very precarious when it comes to job growth, this is just something that we cannot afford right now.
At same time, a cut back in inflation strengthens the U.S. dollar, which sounds good and it is if you plan to travel out of the country and spend money, but if you're a business owner or simply a U.S. resident this is not necessarily good. A stronger dollar equates to lower exports, which is what drives economic strength, and in turn it means fewer foreign travelers will come to the U.S. to shop because it's too expensive for them to do so.
You can get excited about cheap oil all you want, but just keep in mind the consequences extend well beyond your gas tank. Oil prices are back to levels last seen in the 1990s; let us hope the economy does not pull back that much as well.