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How Do Falling Oil Prices Affect the Overall Economy?

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It is rather crude to suggest that the United States, or any world economy for that matter, could end its dependence on oil by switching to renewable energies. The oil beneath our feet does far more than just provide gasoline, diesel fuel, and home heating oil. Oil is refined to produce fuels, plastics and hundreds of different petroleum-based products the modern world would be lost without – including some of the most important components in our smartphones. As such, the price of oil on the open market has a profound effect on the overall economy.

The easiest place to see this profound impact is with gas prices. A low price for sweet, light crude means gas producers are paying less for the raw material they need to make gasoline and diesel. That low-price for crude translates into lower prices at the gas pumps. Moreover, because gasoline and diesel are an integral part of nearly every facet of the modern economy, low fuel prices result in low inflation. As we all know, low inflation is a good thing.

As Milton Friedman once said, “Inflation is the one form of taxation that can be imposed without legislation.” Indeed, when inflation rises it carries with it the cost of goods and services at the retail and wholesale levels. Higher prices without commensurately higher wages lead to less purchasing power for the average consumer. All of this has a downward effect on the economy.

Rising inflation and wages drag everything down by reducing consumer demand. When consumers are not purchasing goods and services, companies must raise prices in order to achieve the same revenues. This creates a never-ending cycle, which ultimately leads to the weakest companies shutting down. On the other hand, the opposite is also true. And it is all clearly seen in the economics of oil. Falling oil prices result in lower inflation, lower consumer prices and greater consumer spending. Over a sustained amount of time, low oil prices ultimately lead to robust economic conditions.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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