After Crude Oil Price Plummets

After OPEC decided not to cut oil production, oil price has been dropping constantly. Overproduction and weakened demand are considered as the two direct causes. The question is, what will happen next?

Impacts on the U.S.

  1. a lower oil price will allow consumers to spend more on retailers and restaurants.
  2. lower oil price means lower cost for energy and raw material, so sectors that rely on oil and oil-related material would perform better.
  3. There would be more hirings and higher salaries outside the energy sector.
  4. For the energy sector, unfortunately, a bad time is likely to come, with layoff and decrease in sales. Also notice that a poor energy market would see more M&As, according to the history.

Impacts on Japan

  1. In short term, the country is facing a deflation risk caused by cheaper oil and consumer goods.
  2. In long term, businesses outside the energy sector would benefit from lower production costs and therefore raise employee wages. Higher wages are expected to support inflation.

Impacts on Renewable Energy

  1. The WilderHill Clean Energy index has been sliding, showing that investors think lower oil prices would undermine renewable energy.
  2. Oil does not directly compete with solar or wind power in the developed world where electricity is mostly generated from natural gas.
  3. In developing areas, oil-fired power is still more expensive than renewable energy even after the price drop.
  4. Where cheaper oil could have an immediate impact is on a critical fuel for renewable energy: low interest rates.

Impacts on China

  1. Low oil cost would stimulate consumption.
  2. Slowdown in construction, mining and refinary activities would weaken China’s oil demand, cancelling out the cheap oil stimulus.

Impacts on Russia

  1. Ruble dropped more than 50% within this year. Russian stock index RTS also dropped 19%, highest since 1995.
  2. The central bank has increased the interest rate by 11.5% and sold $80 billion foreign exchanges to rescue ruble.
  3. 33% of Russian exportation is crude oil. If oil price remains at $60 next year, the country would face a $80 billion loss in exportation, resulting in a 4% drop in GDP.
  4. S&P has adjusted the grading of Russia to BBB-, only one step better than junk bond.

A long-term view is that oil, as a non-renewable resource, would eventually come to a short supply. But would you bet on this now?

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