Plunging Oil Prices—The Irony and the Ecstasy

By: Dr. Lynn Reaser 

Oil prices have sank from around $112 a barrel in June to less than $87 a barrel in mid-October in terms of the Brent benchmark for crude petroleum. This sharp decline has come despite rising hostilities in the Middle East. Continued increases in oil production have combined with projections of slower global economic growth to send prices lower.

The drop represents a significawill-peak-oil-save-planet_44nt windfall for the U.S. economy. Despite the dramatic climb in domestic energy output, we still consume much more than we produce. This year, we are likely to consume about 19 million barrels a day of gasoline, distillates, and jet fuel, while we produce about 12.5 million barrels per day of crude oil, natural gas liquids, ethanol, and biodiesel.

Lower gasoline prices will boost consumer spending by raising household buying power. Lower energy expenses will also help company profits outside of the oil sector. The downside is that our march to energy independence could be stalled as more expensive exploration and drilling activities for oil and natural gas are curtailed. Alternative energy projects could also be put on hold.

Overall, however, this is a welcome gift as the U.S. essentially receives a wealth transfer from the net energy producers of the world.

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