Low Oil Prices: Who Wins, Who Loses?
The national average price for a gallon of gas is less than $3, with further decreases expected. But that’s nothing new. Bear in mind that oil is a commodity, so its price varies according to cycles of supply and demand. For example, in 1986 and 1998, oil dropped below $10 a barrel. In 2008, prices made a dramatic drop from $145 a barrel in July to $33 by mid-December. In early December 2014, oil was about $66 a barrel.
For folks looking for extra cash during this holiday season, lower gas prices are a welcome relief. One of the positives that accompanies low oil prices is an increase in consumer discretionary funds, which in turn leads to spending and can stimulate economic growth. The phenomenon also presents substantial savings for companies that rely on gas for transportation needs, such as national retailers, trucking and airline industries. Excess revenues can be redeployed for other needs, such as more jobs.
One of the drivers of increased oil production, and therefore lower prices, is the innovation of fracking. Its prevalence in the U.S. has led to less dependence on the global oil industry. Countries that are large oil importers, such as China and India, enjoy greater savings as a result of paying lower prices.
[CLICK HERE to read the article, “Slide in Oil Prices Is Blessing for Most,” from The New York Times, Dec. 5, 2014.]
[CLICK HERE to read the article, “Don’t Fear an Oil Bust,” from Slate, Dec. 5, 2014.]
However, lower oil prices don’t benefit everyone. Take the state of Louisiana, for example, which charges a 12.5 percent severance tax to producers. The state’s 2015 budget relies on revenues based on a price of $96.70 per barrel, so if crude oil averages $81 a barrel in 2015, the difference could cause the state to lose approximately $133 million in revenue. Alaska is experiencing a similar situation.
[CLICK HERE to read the article, “How Much Will $60 Oil Hurt Louisiana?” from 24/7 Wall St., Dec. 5, 2014.]
[CLICK HERE to read the article, “What Really Happens When You Cut Taxes on Oil Companies,” from ThinkProgress, Dec. 8, 2014.]
By the same token, countries that rely on oil exports receive a crushing blow in revenues when oil prices drop. Moreover, the oversupply in oil production signals that the global economy isn’t growing fast enough to generate enough consumption demand.
[CLICK HERE to read the article, “For World’s Oil Exporters, Falling Prices Have a Domino Effect,” from NPR, Dec. 5, 2014.]
[CLICK HERE to read the article, “The Dark Side to Falling Oil Prices,” from Guggenheim Partners, Dec. 4, 2014.]
While there are often pitfalls to positive events, it’s important to remember that there can also be a silver lining associated with a negative event. One of the lessons we learn is to take advantage of opportunities as they present themselves. In other words, if you find yourself with a windfall of positive cash flow — due to lower gas prices or otherwise — let us help you choose a financial vehicle in which you can allocate those funds to help boost your income during any undesirable events. As always, please give us a call.
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