As the global demand for oil plummets, consumers are seeing lower prices at the pump. While this seems like good news for consumers in the short run, it leads to many questions about demand for oil and consumer behavior.
The following is an excerpt of that interview:
How far will oil prices fall, and when do you expect them to bottom?
The recent decline in oil prices has primarily been caused by new extraction technologies — 'fracking' — which has significantly increased oil supply and production in the US (some of the decline is also likely due to slowing demand for oil in emerging market economies like China, as that country's overall growth falls). Oil prices will stabilize (assuming no actions by OPEC and stable demand in the emerging markets) when they fall to a level that makes further investment by oil producers unprofitable. Such a level is hard to predict with a high degree of certainty, but I've seen estimates as low as $40 a barrel.
Are lower oil prices helping or hurting the U.S. economy?
Lower oil prices through improved technologies that reduce costs is a good thing. Generally, the lower price of oil reflects a decrease in its scarcity. A reduction in scarcity is always a good thing for people's welfare. One potential negative is that lower oil, and thus gas prices, may lead to more driving, bigger cars and an increase in the consumption of fossil fuels, which could have a detrimental effect on the environment. But overall, it is likely that the lower price of oil is a good thing for the US economy.
Do you expect more robust holiday spending in light of the savings that consumers have derived from lower gas prices?
Historically, lower oil and gas prices have led to greater spending and improved consumer sentiment. I expect that this pattern will continue. We are already seeing an upward spike, for example, in automobile and truck sales here in the US.
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