The average price for gas in the United States is now $2.05 a gallon, while it used to average around $5 dollars a gallon.
The price for oil has fallen more than 70 percent since June 2014. The extreme change in oil prices is a result of one of the most basic aspects of economics, supply and demand. The supply of oil has sky rocketed with no real increase in demand, causing an extreme deflation in the price.
This is because not enough people demand the oil to pay for the amount being produced at the high costs. The United States almost doubled their oil production over the last several years, which has caused the increase in supply; countries all over the world have also experienced a large increase in oil.
The consumer, however, has not produced any greater need to travel or use oil in the past year. This has caused the oil companies and oil producers to drop their prices which results in a large deflation in the prices of oil.
The fall in oil prices has not had the positive effect on the economy that many had predicted, but will actually end up causing more harm to the economy than good. It seemed that this drop in prices would be positive for the economy by providing people with more money to spend. However this has not turned out to be the case. This is because of the way the drop has effected oil companies, small businesses and the stock market.
Economists believe that the deflation of oil prices slows any inflation of prices throughout the entire market, so when oil prices are low the prices of most other goods remain low as well. The lower prices result in a big boost to consumer surplus, causing a large decrease in the everyday consumer’s cost.
In the last year the American consumers saved about $155 billion in gas. Though all this extra spending money for the consumer looks like it would have positive effect on the market, in the long run, the economy will suffer because of falling prices.
Falling prices of oil cause oil companies and small businesses to lose income. When these businesses start to suffer they will have to take outs loans and mortgages to account for their increase in producer costs. When businesses default to loans and mortgages, then banks will begin to suffer, and the whole economy will fall into a slump. The fall in oil prices negatively impacted the stock market and anyone who had stocks in oil-related companies. When businesses suffer there decreased budget forces them to lay off a large amount of their employees. This results in a high rate of unemployment, which is never good for the economy. In the United States alone there were 94,509 announced layoffs in the energy industry just last year.
The costs of unemployment are usually a dead weight loss, meaning there are no benefits for the employers or the unemployed to balance the losses of high rate of unemployment. There are negative effects on an individual and on the entire country. The individual immediately is affected by a reduction in income which results in a reduction in consumption.
The entire country is affected by the higher payments the government has to make for unemployment benefits. There is also a reduction in the income tax being collected which causes the government to borrow money, making the impacts on the economy long term. State governments will tax business when unemployment is high to pay for unemployment benefits. In this way unemployment also has a negative effect on the employers.
Many people talk about the negative effects an inflation in prices can have on the economy, but a deflation in prices can have a negative effect on the economy as well. With the deflation of oil prices there is economic suffering for oil companies and any businesses associated with oil.
Anyone with stocks in oil-related companies suffers a loss of money as well. There are also negative effects for the entire economy when there is a high rate of unemployment. The ample supply of oil is going to remain a problem until there is a change in the county’s demand for oil or a reduction in supply of oil.