Will lower oil prices boost the economy?
Source: Reuters/BRIAN SNYDER
Most economists think so. Some estimate that the recent 40% plunge will provide a $1.5 trillion windfall to consumers around the world. Of course, that’s $1.5 trillion less for producers. But instead of going into the coffers of OPEC, that money will be in consumers’ pockets, who are more likely to recycle it into their economies.
As a result, economic growth estimates are being revised higher for countries from South Korea to the US, at the expense of Kuwait and Nigeria. The US is now the world’s largest oil producer, so there the effects here will be mixed. But we still import 5 million barrels of oil per day. A $40 per barrel drop in price translates into a $70 billion less in the annual trade deficit.
Some worry that problems in the oil patch will spill over into the rest of the economy, but that’s just doom and gloom run amok. Oil’s pain is retail’s gain. Maybe Wal-Marts in North Dakota will even be able to find some workers now.
Around the world, improved growth prospects in Germany and Japan may help those beleaguered economies. It’s true, lower prices will dampen inflation just when policymakers are trying to raise it, but oil is priced in dollars, and the dollar has been rising. Falling oil may strengthen the Euro-zone and Abenomics.
Adjusting to lower oil prices will create some headaches as we adjust, but it’s good news. Sales of electric cars may suffer, but right now 50 cents less at the pump means that much more good cheer under the tree.
Douglas R. Tengdin, CFA
Chief Investment Officer
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