But let us not forget that the Saudi’s can put a barrel of oil on the deck of a ship for $17 – $25 per barrel. So we may have a long way to go. But isn’t this exciting!
This is my third and last post on the subject.
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How Will The 2014 Drop In Oil Prices Affect The World Economy And Geopolitics?
This question originally appeared on Quora: How will the 2014 drop in oil prices affect the world economy and geopolitics?
Answer by Alex Song, Hedge Fund Analyst, on Quora
- Domestically, lower energy prices means more money for discretionary spending. The equivalent effect on the US economy is a tax cut for consumers on the order of $100-125bn. Think about how low gasoline prices are now compared to where they were a few months ago. This saving generally translates into higher consumption on other things like retail spending. For airlines, this will be awesome because the cost of fuel and flying decreases, the effects of which may be passed on to consumers. Net-net, analysts estimate higher consumer spending should boost US GDP by .4%-.5% over the next year. This will be balanced by lower domestic energy production, however.
- Internationally, for countries like China, Japan, and South Korea, which are huge energy importers, each 1% drop in crude prices is the equivalent to billions of dollars saved on their trade balance. Japan, in particular, has been suffering from a trade deficit for the past few quarters. The predominant reason is due to the mounting cost of energy imports (which they were forced to increase due to their shutting down all of their nuclear reactors following Fukushima in 2011). Plummeting oil prices is net-net a huge positive for them. In other parts of the world, low oil prices are squeezing countries like Russia, Iran, and Venezuela in very negative ways. In the near-to-medium term, it may force them to adopt a more conciliatory stance toward the rest of the world on political issues and reforms (Ukraine/Crimea, nuclear initiatives, etc.) due to the poor state of the economy. In particular, Russia may be forced to acquiesce on Ukraine just to get Western Europe to lift its embargo.
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Go there and read. There are many other linked articles. More next week.
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