Monday, November 17, 2014

The Winners and Losers of Low Oil Prices-The Sweet Spot

There are advantages and disadvantages to oil. Some nations will capitalize on lower oil prices while others may see significant economic decline. Those dependent on exports are going to feel the most pain while those important oil are going to find the most benefits. Below is a video on the negative factors of low oil that appears to cover the issue from a shale industry perspective. Oil price has more of a sweet spot that is adjusted as technology, consumption, and production change.

The break even point of shale oil is somewhere between $60 and $80 per barrel (As cited in Bloomberg).  At present prices are between $74 and $80 per barrel; dangerously close to the break even point for shale companies. This of course means less hiring and expansion for this relatively new industry. When oil dips under $80 it puts pressure on international producers.

Despite the potential short-term damage to this new industry the general economy grows when oil is in the zone. Where the benefits of low oil push the economy forward through cheaper transactions costs, as well as put greater pressure on the shale industry to further develop. Cheaper alternatives are explored when oil prices are high and existing industries adapt when oil prices are low.

Some countries will be winners and losers in low oil prices. Those nations that rely heavily on oil to prop up their economies and maintain high oil production costs are likely to be the losers (i.e. Russia). Seventy percent (70%) the Russian Economy is dependent on oil prices and recent fiasco with bills highlight how important that oil is (As cited in The Week). This year Russia is likely to be the loser.

Nations that win from lower oil prices are already established or budding manufacturing centers where any reduction to the cost of doing business is a benefit for growth. Lower oil prices may help the U.S., China, Europe, and a few fast growing sectors in India and Asia. As with any change in prices there will be winners who are in a position to capitalize on cheaper costs and losers who will scramble to balance budgets.

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