Oil Prices and its effects on the U.S. Economy

| July 6, 2018 | Articles: General

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Oil Prices have a great effect on the U.S. economy in many forms like jobs, investment, and growth. Oil exploration and production. Fluctuations in Oil prices play an important role in the different aspects of finance and business. That is why oil price movements are closely watched by economists, investors, and policymakers.

The U.S., although produces its own oil, still has the need to import more to meet the growing energy demands. New technology allowed companies to economically draw oil and gas from shale deposits that were once considered depleted because the cost of extraction would be impractical.

Oil and Business

Oil plays an important role in many businesses, specifically that of the costs of other production and manufacturing across the United States. As an example, there is a direct relationship between the overall cost of goods and the cost of gasoline or fuel prices in the transportation of goods and people. A drop in fuel prices means lower transport costs and cheaper airline tickets. As many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector.

Conversely, high oil prices add to the costs of doing business. These costs are also ultimately passed on to customers and businesses. Whether it is higher cab fares, more expensive airline tickets, higher prices on imported goods and many more. That being said, oil prices do have an effect on seemingly unrelated products and services throughout the U.S.

Oil and Inflation

Rising Oil prices can also influence inflation, as is said in the previous paragraph, businesses will tend to push the increasing cost of oil that affect their businesses to their customer, hence make commodities fluctuate in prices. This type of inflation is what we call as a cost-push inflation by which businesses will inevitably pass on the weight of rising oil prices to customers which cause commodities to rise in prices. Because oil is a determinant of inflation, this also has an effect on cash holding, interest rates and many other aspects of the economy.

Job Growth and Investment Dollars

The exploration of new sources and production of shale deposits have become a strong source of job growth in the U.S. The hydraulically fractured wells tend to have a shorter production life, so there is always new drilling activity to find the next deposit. All this activity requires labor including drilling crews, loader operators, truck drivers, diesel mechanics, and so on. Plus, these workers also help support the local businesses surrounding the area like hotels, restaurants, and car dealerships. Lower oil prices mean less drilling, therefore less work and job opportunities. Consequently, this also means less activity can lead to layoffs which can hurt the local businesses that catered to these workers.

The Banking and investment sector also feel the effects of fluctuating oil prices. There are a lot of different companies drilling and servicing wells on the shale deposits, and many of these companies finance their operations by raising capital and taking on debt. This means that investors and banks both have money to lose if the price of oil drops to where new wells are no longer profitable and the companies dependent on drilling and service then go out of business.

Conclusion

Oil prices have a significant impact on the U.S. economy, ranging from business, inflation, job growth and investment. High oil prices can drive job creation and investment as it becomes economically viable for oil companies. However, high oil prices also hit business and consumers with higher transportation and manufacturing costs. Lower oil prices hurt the unconventional oil activity, but benefits manufacturing and other sectors where fuel costs are a primary concern. Therefore, proper balance in oil prices is key to attaining a stable economy.

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