Low OIL prices, how good of a thing is that really?

in finance •  2 years ago

I have said this before and I have no problem restating it, low oil prices are not a net positive for the economy, and now even the Wall Street Journal agrees with my point of view.  Basically it is like this, energy commodities are literally what power the world's economies.  You price them at either extreme and that is going to have an affect on the economy in the long run.  You eat too much or too little for a couple of days and it's no big deal.  You do the same thing for a ling period of time and you end up dead.  It's very simple physics, any system is going to chill at the lowest entropy possible and that number is dependent on the factors you put into it.

As a matter of fact companies obtaining leverage through issuing bonds and laying off workers to buy their shares back to raise stock prices will work the same way.  It is based on the fact that to get the cheap gas prices or higher share prices you have to kill your workforce and overall productivity.  You kill productivity and that results in less consumers.  So, down the road you are stuck in a stagnant situation where you have no one to sell things to, prices fall or go nowhere and companies go bankrupt. 

"The supposed positive effect of low oil prices on the stock market is also dubious. Historically, the correlation between oil prices and stock prices has been both negative and positive. The market is responding not to oil-price fluctuations themselves, but to what’s driving those fluctuations.

Simply put, when lower oil prices reflect mostly a weaker global economy, stock prices will tend to respond by going down. When lower oil prices are mainly due to good news about plentiful supplies, the market will tend to respond by going up.

The bottom line: Low oil prices have only modest effects on real GDP growth, and which direction it goes depends on how much of the stimulating effect from consumption is offset by the loss in investment in the oil sector."

-WSJ "Are Low Oil Prices Good for the Economy?"

Here is a graph on how US GDP is becoming more dependent on oil production and comparison to other countries.


Original post at traderscommunity.com

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