The economic impact of low oil prices

With the price of oil hitting a low of $50 a barrel and with market pundits betting that it is likely hit the rock bottom price of $40 a barrel, the question that naturally springs to mind is, what does this mean for sustainability? With fuel being so cheap, it may be harder to make an argument for the much needed push for research and growth in the renewable energy sector. Is the oil lobby influencing prices? Let us examine the obvious winners and losers?

What becomes lucid pretty fast is that since aviation fuel is a major operating cost for Airlines, they profit substantially from low oil prices. Manufacturers of chemicals and fertilizers are also winners since they consume gazillions of oil in order to produce their products. The big time losers are naturally the oil companies themselves along with other companies that provide equipment and services to them.

Many countries wholly import their oil requirements, and with oil being cheap their foreign exchange reserves is likely to be comparatively higher. Although most countries will hugely benefit from low oil prices, the question is for how long can the oil exporting countries keep selling their oil at $50 a barrel before they are forced to revise their prices. As the oil exporting countries tighten their belts should we expect a course-correction?

In order to make it economically sustainable Russia needs to sell its oil at about $105 a barrel which is a little more than twice its current price. On the other side of the spectrum is Japan. It is a large energy consumer but produces almost nothing when compared to its energy requirements.

Large oil producers such as Russia & Iran, which are not US allies, will definitely figure in the list of the top 10 losers, if oil prices maintain or dip further than their current price level. The upside to this scenario is that, defense budgets may be trimmed and those funds allocated towards more urgent needs such as medicine, environment which contribute to better quality of life.

Cheap oil will most definitely impact the growth of green energy initiatives and research. In the short run, solar, tidal, and wind energy is likely to prove less cost-effective. I say in the short run, because it will be economically difficult for oil producing countries to sustain oil prices at these low levels.

Although low oil prices discourage further research and growth of sustainable energy, it also indirectly promotes their growth. Low oil prices create a basis for future price volatility. As oil producing countries reduce their production, in order to contain this fall, and since this drop in production is not replaced or compensated, it will reach a point of no return wherein the demand hugely exceeds the supply. This is likely to send oil prices zooming upwards again. With Europe taking measures to come out of its recession, oil prices are likely to normalize in the near future. And with oil prices back to their normal levels, companies will want to reduce their exposure to it and pursue freer energy alternatives. 


References:
http://www.usnews.com/opinion/economic-intelligence/2015/03/09/cheap-oils-winners-and-losers
http://www.economist.com/blogs/freeexchange/2014/09/russian-budget