Lowering Gas and Oil Prices Will Assist in Stimulating the Economy
Given the deep linkages that exist between these stages of the production cycle, this paper argues that higher oil prices may not be a bad thing after all.Any discussion on the dynamics of Oil is incomplete or irrelevant without a reference to Peak Oil. By definition, Peak Oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. The rate of production from Oil fields, regions, or countries follows an exponential growth curve and then starts to decline. This means that extraction of oil from existing sources and new sources hits a maximum at a certain point in time and then starts to decline. Thus, we are faced with the prospect of declining reserves and increasing demand. The resultant scramble for the remaining reserves dominates the oil politics of the global economy.Peak Oil means that the costs of extraction and refining increase relative to the sale price of the oil and hence this is an added factor that must be taken into account when considering the effect of the reduced price of oil. As we argue throughout this paper, the reduced price serves to undercut the oil producers and leads to production freezes and diversion of oil into storage in anticipation of a higher price down the road.Traditionally, economic growth slows as oil prices rise, although high prices might have less effect now than they had in the past, given the combination of low worldwide interest rates. The continued expansion of the global economy over the last couple of decades has been mainly due to a relatively stable oil price and conversely, the contractions in the global economy have been due to “oil shocks” brought upon by extreme price volatility. This has been the case in the decades following the years of 1971-73 where oil price volatility has led to recessions in the developed world.