If you have been to or even driven by a gas station recently you probably have noticed that gas prices have dropped considerably. A lot of gas stations in the area are selling gas for under three dollars per gallon which is pretty unheard of. The recent drop in gas prices has been due to the recent dips in oil prices. Over the past month oil prices have dropped by almost 20 dollars per barrel. Oil is one of the more important resources in the modern world and the price of oil dropping can have effect a lot of things. One of those would be trade.
But how exactly would these lower oil prices impact trade. The first obvious impact would be on the counties that export the most oil like Saudi Arabia, other middle east countries and Russia. The terms of trade in these counties would most certainly drop because the price of their main export is decreasing while the price of their imports is likely staying the same. At the same time the countries that import the most oil like the United States and China would see their terms of trade increase because the price of their imports is dropping while exports remain constant.
Linked here is and article that goes more in depth on the effect of low oil prices on oil exporting countries. This article talks more about the historical impact on counties that export oil when oil prices are low.
Another impact on trade we might see would be that with oil prices so low it is a lot cheaper for companies to export their goods. This could make exports and imports cheaper for countries because the price of shipping the goods will be lower. The change in terms of trade would just depend on which factor changes more.
Overall I believe the recent drop in oil prices will benefit the United States greatly and not just because gas is cheaper. Unfortunately for counties like Saudi Arabia they will be worse of for now but I'm sure oil prices will bounce back.
I agree with what you said about terms of trade increasing because of the price of their imports are dropping. You stated that you believe the United States will benefit greatly from the drop in oil prices, but you forgot to mention some key components as to why this will so significantly benefit any country that is a big oil consumer. Oil related transport costs will directly fall, which will lead to lower cost of living and a lower inflation rate. With a stagnant real wage this will lead to more spending money, and less money going into the gas tank of the consumer’s car. This spending money will lead to stimulation of the economy of whatever country is importing this cheaper oil.
ReplyDeleteMost oil producers as of recent have increased production of oil due to high demand, therefore causing prices to go down (supply and demand). Many U.S. citizens and companies are adapting to the lower prices and becoming less conservative and consuming more oil. This helps the terms of trade of the U.S. because prices fall for oil. In the the long run, I can potentially see the decrease in oil prices hurting us worse than ever. Many major oil companies have already talked about cutting production which would jack up prices to reach there $100 a barrel budget mark in order to stay fiscally balanced. If this was to happen the U.S. economy would suffer because prices would extend past where they lie right now. At that point the U.S. would be importing more oil at a higher price. Thus, hurting are terms of trade in the long run.
ReplyDeleteBuilding off of Cole's idea on increasing the supply, I recently read an article about a Middle Eastern oil producer. It talked about how they were going to increase production as well as drop their prices in order to gain some market share. Also, a big factor on the price of oil has to do with the U.S. dollar. Over the past few months, the USD has become quite strong. Since oil prices are valued using the USD, many countries would seem to buy less due to the turn off from the exchange rate. Lastly, the summer travel season has come to an end, which means two things for the U.S. The first is lower demand for America until the holiday travel season picks up next month. The other reason is the cheap winter blend, containing butane, that gas stations use because of looser EPA regulations for the cooler months.
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