Impact of Reduction in Oil Prices - Essay Example

Decreasing demand for oil around the world has driven oil prices to a two-year low. The reduction in world oil prices is being seen as a positive sign for economic growth. Prices of various utilities including gas, heating, and consumer goods are tied with fuel prices due to transportation costs, and hence a drop in oil prices potentially means a reduction in overall prices of other utilities. While this seems advantageous for consumers who will now have to pay lesser bills, the implications of plummeting oil prices extend beyond the temporary impact. In a Questions & Answers session with Josh Zumbrun and Brian Baskin published in the Wall Street Journal (n.pag.), the two economics correspondents highlighted the implications of a reduction in world oil prices.

It is true that a reduction in oil prices will increase GDP, create more jobs and reduce consumer prices however the long-term implications can sabotage technological development in shale oil exploration, oil extraction, and petroleum production projects. Most oil projects are large-scale development projects that require huge funding but a reduction in oil prices will make them less feasible. Investments in the oil sector will reduce and this will threaten the production of fuel which is a highly sought-after product for the industries.

There are other psychological implications to the oil price reduction. Firstly, lower prices will stimulate a behavior of greater consumption which will increase consumer spending. Secondly, the sense that gas prices are low, consumers will not find an incentive to switch to more fuel-efficient cars. As a result, investment in fuel-efficient cars will decline to make the production of fuel-efficient cars unprofitable. Another impact would be that people will start to spend greater amounts on fuel and burn more fuel. The drop in prices will thus be adjusted by greater consumption of fuel and this will increase the overall demand.

Considering the long-term implications of the drop in fuel prices, there is a need for the government to regulate oil prices since oil is an important commodity.

In the end, a reduction in oil prices has many disadvantages in the long term. Although the demand and supply forces may adjust, if the prices remain low for a prolonged period of time, there is likely to be a drastic reduction in oil projects and other connected projects. The imposition of a price floor can help control consumption so that it is not left unchecked.