Tags: oil | Russia | prices | government

Low Oil Prices Will Have Negative Consequences

By    |   Wednesday, 03 Dec 2014 08:04 AM

Every trend in the markets tends to continue until it has gone too far. Oil prices offer an excellent example of this idea.

When oil prices are rising, exploration and production increase. This is normal behavior since higher prices are appealing to producers. Eventually, supply exceeds demand and prices fall. Lower prices force marginal producers out of business until at some point, demand exceeds supply and the cycle can begin again.

There are winners and losers at all stages of the oil price cycle. When prices are high, consumers suffer. Low prices punish producers while consumers benefit. This has been true since oil was first discovered, but this time there are additional factors to consider.

Governments in Russia, Venezuela and Iran depend on oil revenue to maintain nearly complete control of their respective countries. Governments in other countries in the Middle East depend on oil to provide jobs for their citizens, which help them maintain a lesser level of control. A terrorist organization needs oil revenue to fund its ambitions. Low prices threaten the balance of power around the world.

Never before has Russia been dependent on the revenue to fund its military ambitions. But now Putin's desires to rebuild an empire hang in the balance. In Iran, the government's ability to become a nuclear power could be delayed without funding. ISIS might need to expand their territory to maintain revenue that allows them to meet their goals.

We don't know how any country or organization will react to low prices, but we know that unpredictable consequences are inevitable. Low oil prices will be good for consumers until they result in global tensions flaring up.

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MichaelCarr
Every trend in the markets tends to continue until it has gone too far. Oil prices offer an excellent example of this idea.
oil, Russia, prices, government
275
2014-04-03
Wednesday, 03 Dec 2014 08:04 AM
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