Oil is A Fickle Friend

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I like to say that oil is to the world economy as water is to plants and animals.  Without water plants don’t grow, animals then don’t have plants to eat, and etc.

And without oil the industrial economy really doesn’t work either.  No oil means that just about nothing gets made or moved. Without anything being made or moved, there is very little to buy and sell.

I’ll risk saying the obvious, but oil does a lot more than make gasoline that you put in your car.

So it’s great to be a seller of oil and oil related products. Everyone depends on what you have.

But when the price of what you’re selling plummets and starts to get very close to or below the cost per unit of producing that oil, then those happy oil companies start to get a little nervous.

And just like the poor animals who depend on healthy plants for food, there is a lot of the economy that is dependent on oil companies doing well for their businesses to do well.

Just think of all the welders and other oil field workers who are out of work because it’s not cost effective to keep them employed.  These workers were making a great wage and were probably feeling pretty good about life.  They went to the local dealership and bought a new pick up truck, bought a house with a mortgage, and maybe even a boat.

Now they can’t afford the truck, the house, or the boat.  That means the dealership doesn’t need as many salesman or mechanics, the bank may have a loan that goes bad, the municipality where that home is may not collect as much property taxes, and the marina will stop receiving monthly dues.

But here’s the other side of the coin: since oil is such a major input to all of the products we consume, and since we consume so much oil (gasoline) directly, the economy overall may actually stand to benefit from lower oil prices.  If it costs less to make widget A, then Acme Co who makes widget A has a higher margin, makes more profit, and can take that profit to expand its business.

If I only knew which were ultimately preferable, high or low oil prices.  But unfortunately both sides of this coin are quite shiny and whether a quarter is facing tails or heads side up, it’s still worth 25 cents.

Our company has seen regional problems from lower oil prices.  Of course Houston is down at the moment.  But other places are doing quite well and some industries are very happy with lower oil prices (MarketWatch).

I’ll take a chance and throw in my two cents on the issue: we would all be a little better of with higher oil prices.  And the reason is exports.

Low oil prices are pushing the dollar higher, which kicks up a steady headwind for exports. In 2013, exports were 45% of the US economy.  And when the dollar is higher than the currencies of our largest trading partners like Canada and Mexico, our outflow of goods produced in the US slows down.

And it’s safe to say that even though we might bemoan high gas prices, the economy was moving along quite nicely in the last few years even while oil prices were somewhat high. So there are definitely winners and losers in the game of falling oil prices, but having the giant oil companies and all of their reliant industries do well is usually better for everyone.


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