One would expect lower oil prices to be great economic news. However there are a couple of problems which could make them the worst possible news – our economy does not cope well with deflation and this could indicate the start of a major economic decline.
Oil is such an important part of our economy that lower prices should stimulate economic activity to the point we would easily achieve full employment and all our economic problems would be solved. Life may be a little more complicated. Most news reports suggest the problem is increased supply from U.S. fracking but there could also a decreased demand for oil.
The first complication is that our economy does not cope well with deflation. We can probably cope with falling prices but falling wages are a different matter. Very few people would willingly take a cut in income. A further and more serious complication is that most of our money supply is based on debt and it is likely the owners of this debt would want to be repaid in full in deflated money. Instead of having economic utopia we could have economic chaos.
The second concern about falling oil prices is with what is happening in the real side of the economy. Too often we evaluate economics only in financial terms. Sometimes this hides problems.
Probably the most serious economic problem is that we have used up the most easily accessible energy and mineral resources. There are lots of these left on the earth’s surface but they are so difficult and expensive to extract that it is no longer viable to do so. This is bound to have a profound effect on our economy, reduce the potential for economic growth and maybe force us into negative growth. It could be that high prices for energy and mineral resources have messed up the economy so that we can no longer produce as many goods and services as we were. It may be the recent high costs of oil has contributed to its own reduced demand.
If this scenario is correct or even nearly correct then we are in for some serious economic problems. It could be that falling oil prices are a leading indicator of a crisis.
This has been a difficult post to write because one does not want to witness the human suffering that will come with a prolonged economic downturn.
One further observation: Although headlines show the price of oil has been falling the news has been slow to reach the owner of our local gas bar.
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