At first glance, low oil prices seems like a good thing. The massive decline in the price of oil has led to significant reduction in gas prices as well.
Friday, February 6, 2015
For most consumers, $1.99 per gallon is something to cheer for. But there are other, more negative aspects to oil’s decline.
Job cuts in the US reached a 2-year high in January due in large part to the energy sector, Fortune Magazine reported this week. Oil producers have struggled to cope with oil’s falling price point, meaning many of them are barely breaking even. As a result, they have had to trim payrolls at a high rate. Of the 53,041 jobs lost last month in the US, 40% were a direct result of oil prices, as per data from global outplacement for Challenger, Gray & Christmas. That monthly job cut mark was the highest since February 2013 and 18% higher than January 2014. “We may see oil-related job cuts extend well beyond those industries involved with exploration and extraction,” John A. Challenger, CEO of the outplacement firm, said in the report.
However, Challenger sees room for optimism. “Despite the recent surge in job cuts, the net result of falling oil prices could ultimately prove to be positive for the economy, as a whole.”
Jury still out on the pros and cons of the oil price decline
Challenger might not see oil price decline as a detriment to the economy, but other analysts do. According to the Wall Street Journal, a number of nations across the globe have felt the sting of oil’s decline.
Europe and Japan raised concerns over deflation. China increased fuel-consumption taxes by 50% since November. Indonesian authorities did away with fuel subsidies altogether and gas prices have increased. Brazil experienced a fate.
Still, that doesn’t necessarily mean the US will follow suit. Those economies have separate issues as well that could be exacerbated by the oil price drop.
“There’s a lot of uncertainty around the strength of economies around the world,” Louise Keely, president of the Demand Institute, a non-profit think tank that studies consumer behavior, told the WSJ. “That means the drop in fuel prices doesn’t necessarily flow through into consumer sentiment.”
In other words, it remains to be seen whether oil’s price decline is ultimately a good thing or a bad thing for the US economy. While energy sector employees are losing their jobs, consumers enjoy the extra money in their pockets allowed by lower gas prices. Time will tell how the market will look once the dust settles.
In the meantime, US stocks opened higher Thursday morning, with all 10 S&P 500 sectors in the green. That index along with the Dow both gained 0.5% at the open, while the Nasdaq started the session 0.3% higher.
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