Low Prices of Oil: Its Effect on the Economy
While low prices for oil might sound good for the common man, the impact it has on the global economy is the complete opposite. Regardless of the proliferation of alternative sources for energy, the oil industry still plays a vital role around the world. Production of oil has increased rapidly since 2015, due to more efficient ways to extract oil. This production is only going to continue to become faster with the upcoming years. With these two factors put together, it led to a significant decline in the rate of oil.
The reduction in the cost of oil leads to low profits or even losses, and this ultimately leads to less money for investment for production and exploration of oil sources. Firms and banks which had lent money for oil investment are at risk of losing money, which will have a bad effect on the economy.
Most oil-exporting countries heavily rely on revenue from oil production to fund government spending. It makes it difficult for these countries to pay off foreign debts and balance their currency. For example, Russia gets around 70% of its tax revenue from its oil and gas industry. If the price of oil per barrel keeps reducing, the government will face a significant budget deficit.
Although a fall in the price would mostly be beneficial to oil-importing countries, it can indirectly affect the countries economy. When a country is very dependent on exports, and its production reduces, it adversely affects its economy too. This leads to a trade deficit, which means that the cost of the country's imports exceeds its imports.
The demand for oil is increasing and its low price is now welcoming more countries to import oil. But the price is falling to a level where its production becomes uneconomic. Many oil-producing countries are facing unprecedented losses which would have negative effects on the global economy.