I keep reading about how the reduction in the Brent Crude Oil price offers stimulus to the economy...but thats not how that works. Classic example of economists either interpreting things in reverse, or looking at effect, and not thinking about cause, or even thinking as an effect as a cause. The notion goes, that since crude oil prices are down, the price of gas goes down. This saves consumers money at the pump, and so, they have money to spend on other things. Voila, economic stimulus, right? Well, not so fast. This perception is heavily reliant on the false idea that oil companies just suck up money, stuff it in limousine seat cushions, and exist separate of the economic cycle. Not so of course. With a decreased price per barrel of oil comes less investment in oil resource development. Currently developed resources, often slow production as companies wait for prices to rebound. With roughly (very roughly) 250,000 people in Canada employed in the oil and gas sector, (both in development and support) a reduction in oil profits impact all of these consumers. A vast majority of the oil industry works on production based incentives, and so, many workers in this sector see a reduction in their incomes, if they arent just laid off. When oil companies spend less on drilling, (currently, a rig might charge about $575+/ft of depth if memory serves) a rig crew might see less work, or no work at all. The rig crew is composed of consumers, all with less money to spend on other things. Thats an economic hit, not a stimulus. In 2012, it was estimated that oil producers just in the United States alone, spent upwards of $150 billion on oil and gas drilling...just drilling new wells. Thats to say nothing of support, midstream delivery, refining, or any of the connected industries that provide things like machining services to the oil field. The money spent on drilling is money being spent back into the economy. Things like this seem to be ignored, or given nearly no weight by economists who herald an economic boom as oil prices plummet. Now, this shouldnt be thought of as advocacy for more expensive oil. I dont know what a fair market rate for a barrel of oil is, and I dont think that OPEC knows either. In the end, price fluctuations of commodities are dependant on how badly the market wants a given commodity and right now, it seems that the market will bear a reduced cost of the crude oil commodity. Nothing wrong with that. All Im getting annoyed at here is reading from so many economists who talk about how some consumers benefit as they ignore those consumers who are financially less well off because of decreased oil prices. Analysing one side of the picture doesnt help anyone understand whats going on.
Posted on: Fri, 31 Oct 2014 12:14:30 +0000
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