The recent tentatively agreed upon nuclear arms deal with Iran will impact oil prices in the global economy
. Successful implementation of the agreement will result in the removal of current economic sanctions on Iran, and will allow the country to take advantage of its oil reserves and increase the supply available in the global market. Naturally, the supply increase will cause an overall drop of oil prices around the globe. The sanctions currently in place have reduced production to 2.8m barrels of oil per day and exports are at a level of 1.1m barrels per day, which is half of what export rates were in 2011. The prospect of an upcoming increase to oil supplies already decreased the price of crude oil by 3.8 percent to $54.95 a barrel.
The agreement may throw some prior predictions about the fate of oil prices for the rest of this year and next few years into flux. A recent Reuters post (presented on this blog by Matthew Moore) had analysts predicting oil prices to stabilize in 2015 and then rise in 2016 and 2017 due to an increase in consumer demand in response to low gas prices. However, the Iranian agreement changes this story, as the demand shift will be met with a supply increase as well, perhaps lowering oil prices even further in the future. The effects of low oil prices have been felt by oil suppliers in the U.S., as oil and gas industries were two of the biggest losers in terms of employment in the recent March job report. While consumers may rejoice at gas prices being lowered below $2.00 a gallon once again, producers and suppliers in the U.S. will likely have to respond by laying off more workers. This certainly does not bode well for job outlook for the near-future in the energy sector, but perhaps the benefits to consumers and firms which will save with lower gas prices will be able to offset the job loss with increased consumption.
http://www.ft.com/intl/cms/s/0/77bfb8e4-d9fc-11e4-ab32-00144feab7de.html#axzz3WUB2qKDj
4 Comments
The hope is that increased consumer spending as a result of saving at the pump would counteract contraction in the energy industry, but from what I have read, this has not yet been born out. Consumers’ oil savings has been saved instead of spent so far, which could perhaps be an indication of poor consumer confidence in the economic recovery.
Just because consumers are saving money at the pump doesn’t mean they’ll feel the need to splurge elsewhere.
Our model suggests we consume on the basis of expected real “permanent income” or lifecycle income. If consumers aren’t convinced prices will stay low, then they won’t splurge….
It doesn’t necessarily mean they’ll feel a need to “splurge”, but saving a significant amount of gas money certainly suggests that people will have the means, if not the need to spend elsewhere.
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