Oil powers the transportation, freight, and shipping industries. In many ways, it keeps the world economy moving. And oil's status as a cornerstone commodity means price shocks, either up or down, can have dramatic repercussions.
Oil prices dropped more than 20% on Monday to around $35 per barrel after OPEC, a coalition of oil-rich countries in the Middle East that produces 40% of the world's supply, failed to strike a deal with other producers, like Russia, resulting in a price war. The stock market subsequently fell nearly 8%.
"The oil market was already suffering because of a potential slowdown from the coronavirus," says Jamie Cox, managing partner for Harris Financial Group. "We're seeing this expanded reaction because markets were already afraid."
While lower oil prices may seem like a good thing for consumers, economy-wide, there can be other ramifications and ripple effects. Here are the pros and cons of lowered oil prices.
Low oil prices are a reflection of an oversupply in the global markets. OPEC and Russia have long been major oil producers, but the uptick of domestic drilling and production in the U.S. has added even more to global reserves — all while the demand for oil has actually gone down.
"We produce a lot more oil than we're demanding," says Scott Colbert, chief economist at Commerce Trust Company in Missouri. A price war could hurt businesses and revenue in countries, including the U.S., that depend on oil production.
"There's a lot of oil drilled here in the United States that is not profitable if it's only selling for $30 per barrel," Colbert says. "Those people drilling right now are all going to cut back, and you'll see production come down in the U.S."
As a result, analysts say you could see job cuts in some parts of the country, like Texas, Oklahoma, and North Dakota, which have all benefited from huge increases in production in recent years.
Although low oil prices can cause problems for producers, consumers might see cheaper gas as a result. That would make it less expensive to fill up your tank and get to work. But you might feel the less pleasant results of low prices in other areas, like your investment portfolio.
As is clear from Monday's news, oil prices can affect the markets in a few key ways. Stocks related to the oil industry can rise and or fall with prices. Companies that depend on oil, like airline and cruise companies, are also closely intertwined with oil prices, and retail stocks can be affected as the cost of transporting goods to their stores can fluctuate.
So while you might not feel the pain at the pump because of lower oil prices, you may feel them in your portfolio. At least temporarily: In the past, every downturn has ended in an upturn as stocks have rebounded.
Overall, Colbert says, when oil prices go down, "the winner is the average consumer. And the losers are the energy companies, the drillers, the states that have oil reserves, and the banks funding it all."
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