Why Falling Oil Prices Will Have a Greater Impact Than You Think

Since June of this year, the global price of crude oil has gradually plummeted by an unheard-of 40%, down to a five-year low. The drop can mainly be attributed to a rise in U.S. oil production and OPEC’s subsequent refusal to cut its own production to keep prices stable.

As a result, consumers around the world are saving billions of dollars on commodities like gasoline and home heating oil, while oil oligarchs are slightly less wealthy than they might have been without the price drop.

But the impact of this dramatic fall in oil prices stands to have more far-reaching effects than giving consumers a bit more cash for their holiday shopping.

As it currently stands, the decline of big oil companies could result in one of the biggest redistributions of wealth in modern history, giving low-income households extra money to spend on staple goods like clothing and food they otherwise wouldn’t be able to afford with higher gas prices. According to a December 1 Washington Post article, it could even end up affecting negotiations regarding Iran’s nuclear program to Federal Reserve policies.

“Average Americans certainly stand to benefit from a drop in oil prices,” says Mandy Raps, in Marketing with Dragon Products, a leading oilfield equipment manufacturer. “Lower oil prices means more money in their wallet when filling up at the gas station or paying their home heating bill, so the ultimate effect is like a pay increase.” Relative to alternative energy sources, however, declining oil prices can have a different effect. “There has been a shift in the energy industry towards more alternative sources – solar, wind, nuclear,” adds Raps. “These sources, in their infancy stages, are typically more expensive than conventional oil and gas until they become more widespread. A drop in oil prices can delay widespread adoption. So it can have an adverse effect on green sources of energy.”

One uncertainty, however, is whether continued oil production in the U.S. will help the country reach the energy independence it has been aiming to achieve for so long. With OPEC nations and the U.S. producing surplus quantities of oil, many oil companies are slashing budgets and halting plans for new drilling developments, according to one Forbes report.

But as oil companies slow down operations, they open up more opportunities for Americans to take advantage of renewable energy sources like solar and wind power that could help the U.S. finally liberate itself from imported oil.

Regardless of what happens, it’s clear that this recent fall in the price of oil will have dramatic effects that manifest themselves around the world.