Economics / Finance / International Business

Oil Prices Plumetting, and Dragging Stock Markets Along With Them

Oil Barrels with Red Arrow isolated on white background. 3D renderStock markets around the world have been down dramatically since the start of the New Year, with the Dow dropping over 1,000 points, and other major countries now experiencing corrections and bear markets. This very sharp decline is due, in large part to oil prices, which have been falling sharply since the start of the fall.

Once trading at over $100 in October 2015, the price of crude oil has now fallen to under $30. That number will likely only keep getting worse as investors expect Iran to soon take actions that lower the price even more. Recent economic sanctions from the western world have been lifted on Iran, and in an attempt to bring more cash back into its economy, tens of millions of barrels are estimated to be sold, further saturating an already heavily oversupplied oil market. If investors’ predictions are true, stocks could even go down to as low as $10.

Despite this steep slide in price, one may ask how just one commodity has had such a profound impact on the economy. Not surprisingly, the performances of energy companies are heavily tied to the price of oil, and as investors are pulling out of oil commodities, they are doing the same with energy stocks.

The energy industry has a large presence on Wall Street, so its not surprising that as energy stocks fall, the Dow and S&P 500 decline noticeably. And energy has taken a large hit as the S&P Energy Sector Index has fallen by over 10% just this month.

Clearly, this drop in crude oil price has been worrisome for financial markets, but there is undoubtedly an irony to this situation, because in many ways, the sharp drop in oil prices has been great for the economy.

The AAA Daily Fuel Gauge Report now has the national average gas price at just above $1.80. This large break at the gas pump should only lead to increased spending power for the average American, and lead to further job growth in most industries. In addition, the drop in prices does reflect America’s continued drive towards energy dependence.

This dichotomy between the positive correlation of investor success and oil prices and the inverse relationship between everyday consumer success and oil prices makes me more optimistic than some others who are comparing the situation to 2008. The drop in crude oil may be over a short period of time, but oil as a commodity has already been decreasing in popularity for many years, and that’s mostly good for the U.S.

Increased use of natural gas and higher fuel standards have caused Americans to demand less oil, which is saving the average citizen money. Wall Street may continue to experience a decline, but even considering the recent drop, the Dow is still very high compared to almost any point in history. Investors are right to have some concerns about the economy, but it’s certainly not time to panic for the average American.

Sources:

http://money.cnn.com/2016/01/18/investing/iran-sanctions-hoarding-oil-prices/index.html?iid=EL

http://www.nasdaq.com/markets/crude-oil.aspx?timeframe=18m

 

 

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