myWhen I went to the gas station in Ann Arbor last year in January, the price of gas was around $3.40 per gallon. Now oil prices have lost nearby half their value. Of course, not only myself but also other people are really happy about cheap gas price because we have extra money that we can spend on other goods or services rather than spend money for the gas. However, does it necessarily mean that cheap gas price is a good sign for economy?
Oil prices are one of the crucial factors that shape the global economy. When the gas price falls, there are winner and loser, which partly elaborate zero-sum game. The obvious winner in the decline in the price of oil is a consumer who regularly goes to the gas station. This is because the consumer gets additional money to spend on other goods and thus their spending power increases. This benefit is especially greater for low and middle-income households since gas consumptions represent a significant portion of their income.
Let’s examine the obvious loser in the continued decline in oil price. It is evident that a lot of energy companies will suffer from the drop in the price of oil. The reason is very simple when we consider the expensive cost of extracting oil. Therefore, the loss would be greater for companies that employ the costly technology such as extracting oil shale underground. In other words, oil companies are losing their profit due to higher costs that exceed their profits from selling oil. The problems exacerbate when the energy companies try to lower their labor costs as possible to minimize their loss. This is what exactly Houston-based OFS Energy Fund did and they lay off about 150 employees. Moreover, there is another negative effect for energy firms when the oil price drops, which is a decline in their stock prices. According to data from FactSet Research Systems, the market value combined of 24 energy companies lost more than $ 263 billion compared to a few years ago.
In addition, when the collapse of oil prices continues, it is inevitable for manufacturing companies to avoid a profit loss. The U.S. shale-drilling production helped Midwest manufacturing economies to boom but the drop in energy prices led them to stop producing energies and lay off 700 workers.
The impact on the global economy is both good and bad. The IMF forecasted global growth at 3.8 % for this year, as fall in oil price would lead to increase global gross domestic product. However, many experts also claim that growth problems in Japan, China, Europe and other developing countries would exacerbate global growth.
More importantly, however, it is substantial to know whether a country is a net energy importer or exporter. South Korea, Japan, China and India are net energy importers. These countries buy more energy from other countries rather than sell or export their energy to others countries. Therefore, it is beneficial for these countries since they import cheaper oil, indicating they have additional money to spend on other activities or goods. On the other hand, net energy exporters, such as Russia, Mexico, Iran and other countries that heavily rely on the revenue from oil will get a significant damage from cheaper oil prices. Eventually, it is a zero-sum game, which describes a situation in which a player’s gain or loss should be exactly same as the loss or gain of the other player.