This is widely being blamed on oil prices (edit: the virus would have been priced in last week to some extent, but the decision by Saudi Arabia to increase oil production happened over the weekend and hadn't been).
Oil prices going down is a good thing for the economy.
I think people are confusing cause with an effect/correlation. Oil going down usually indicates a recession. Bad economy -> Lower demand for Oil -> Lower oil prices. In that case it's a signal/trailing indicator.
In this case it's: Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity
> Oil prices going down is a good thing for the economy.
That is no longer strictly correct. The ideal oil price for the US economy is a balance between high and low, which provides a high degree of employment for the US oil industry, oil production and export expansion remain high, and provides a reasonable price for US consumers when it comes to gasoline.
Oil in a range of perhaps $45 to $75, is ideal.
At $25-$35 you're going to eventually hammer the US oil industry and its jobs, as the hedges fall away. That will hit the US economy negatively at least as much as the low oil prices benefit consumers.
Russia is playing a bad game of chicken with Saudi Arabia and US oil, claiming they can endure ~$30 oil for a decade. It's false of course. Their personal incomes have been falling for six or seven years in a row. $30 oil will contract the Russian economy at worst, and stagnate it at best, so it would be ten more years of declining living standards in Russia (the last thing Putin wants to see, so it's a false bravado on his part, as typical).
Saudi Arabia and Iraq will be crushed fiscally by low oil prices. Saudi needs $83 oil to balance their budget. Canada will take a modest hit as well.
China is the prime beneficiary as a massive importer with modest production, they're in the position the US was in previously.
I think you're the only person in this thread presenting arguments based on facts. I would just like to say that I really appreciate that, especially when everyone else is running around like chickens with their heads cut off like the sky is falling.
"Increased oil supply -> Lower oil prices -> Everything gets cheaper to make -> Increased economic activity"
There would be increased economic activity if businesses don't close left and right because of a combination of decreased demand and supply as both consumers and workers self-isolate and live in quarantine, and the knock-on effects of China's reduced manufacturing capability (soon to be followed by reduced manufacturing capability of much of the rest of the world).
This stock market crash is just the tip of the iceberg.
The tops of political, administrative, business, and military hierarchies tend to be overwhelmingly old, and most susceptible to succumbing to this outbreak. As many of them die, as the bodies they govern are plunged in to chaos and societies around the world go in to crisis mode, the markets will respond even more adversely than they have already, as the markets don't like uncertainty, and there's no end in sight to such uncertainty for the foreseeable future.
There is little economic upside from this pandemic. Few ways of profiting from it except by shorting nearly everything and buying gold. The bond markets and treasuries are also likely to suffer as governments default.
There's also decreased demand - look at airlines, jet fuel uses 1.7 million barrels per day normally, and COVID-19 is causing fewer people to want to get on planes.
The fraction of the price drop that can be attributed to large producers flexing market power versus the decreased demand is a tricky thing to determine.
Its easy to play connect-the-dots. Rarely is that the whole story. There are many other dot-to-dot paths that result in very different effects. The sum total of all the chains is what makes the economy so hard to predict.
Most of those who work in drilling will be laid off in the next six months. Been there done that. But it doesn't change the fact that it will be over all beneficial to the economy.
I do believe you are correct that the money the average consumer will have in their pocket will be good. But can’t help but think there are other economic implications in this huge oil drop. The drop was not initially put in place by breakdowns in opec talks. But COVID-19. So what I am getting at is a drop in manufacturing, consumer spending, and travel. I’m just scratching the surface but I hope you understand what I’m getting at.
Maybe it's because the US is now a massive oil producer, but there are a lot of oil companies in a lot of debt, so depressed oil prices will force them to go into bankruptcy. Next step will be US government propping up the industry somehow, IMO, either with a bailout or by buying oil at above market prices and increasing strategic reserves.
Good for short/medium term economy, terrible for the environment though unfortunately. So probably bad for the long term economy when carbon/environmental risks take effect.
You are not fully correct with "Oil prices going down is a good thing for the economy."
This is true only as long as oil prices are high enough for producers to keep producing.
Heard of shale-oil margins?
