$50 per barrel oil is clearly less impossible to live with than $30 per barrel oil, because most businesses cannot make a profit with $30 per barrel oil. But is $50 per barrel oil helpful?
I would argue that it really is not.
When oil was over $100 per barrel, human beings in many countries were getting the benefit of most of that high oil price:
When the price falls from $100 per barrel to $50 per barrel, the incomes of many people are adversely affected. This is a huge negative with respect to world economic growth.
If the price of oil drops from $100 per barrel to $50 per barrel, this change adversely affects the income of a large share of people who formerly benefited from the high price. Thus, the drop in oil prices affects the incomes of many of the people listed in the previous section.
Furthermore, this drop in income tends to radiate outward to the rest of the economy because each worker who is laid off is forced to purchase fewer discretionary items. These workers are also less able to take on new debt, such as to buy a new car or house. In some cases, they may even default on existing debt.
A drop in oil prices from $100+ per barrel to $50 per barrel leads to job layoffs by oil companies and their subcontractors. Oil companies and their subcontractors may even reduce dividends to shareholders.
While oil prices have recently been as low as $30 per barrel, the subsequent rise in prices to $50 per barrel is not enough to start adding new production. Prices are still far too low to encourage new development.
In 2016, other commodities besides oil have a problem with price below the cost of production.
Many commodities, including coal and natural gas, are currently affected by low prices. So are many kinds of metals, and some kinds of food commodities. Thus, there is pressure in a wide range of industries to lay off workers. There are many parts of the world now feeling recessionary forces.
As prices fall, the pressure is for high-cost producers to drop out. As this happens, the world’s ability to make goods and services falls. The size of the world economy tends to shrink. This shrinkage is clearly not good for a world economy that needs to grow in order for investors to earn a profit, and in order for debtors to repay debt with interest.
Growing demand comes from a combination of increasing wages andincreasing debt.
The recent drop in oil prices from the $100+ level seems to come from inadequatedemand for oil. This is equivalent to saying that oil at such a high price has not been affordable for a significant share of buyers. We can understand what might have gone wrong, by thinking about how demand for oil might be increased.
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