Will Lower Gas Prices Bring Economic Recovery?

 
By Janice L Barrett

With crude oil falling below $30 per barrel, gas prices are also plummeting and Americans are filling their tanks with gusto. While lower energy costs are bolstering consumer confidence and hopes for a recovering economy, the truth is that Americans have every reason to be concerned about the current economic situation. Regardless of whether the consumer is upper, upper-middle, middle, or lower on the wage-earning bracket, the chain of events that are unfolding have the potential to affect everyone. And, not all potential outcomes are positive.

The primary reason for the drop in oil prices is that old adage known as “supply and demand”. In recent years, the world has had an unquenchable thirst for fossil fuel, and the oil cartels in the Middle East were very adept at controlling output in order to assure that supply was always slightly less than demand. This had the effect of driving up oil prices, with the subsequent domino effect of higher prices at the gas pump. As gas prices soared between 2006 and 2010, an interesting phenomenon occurred. Banks and finance companies that had engaged in sub-prime lending of high-risk loans suddenly found themselves insolvent as foreclosures skyrocketed. With some of the oldest and largest banks in the U.S. no longer in existence, the federal government moved quickly to legislate new rules for lenders in hopes of eliminating the practice of sub-prime lending.

In the meantime, gas prices continued to remain high and consumers traded in their gas-guzzling SUV’s for fuel-efficient transportation and some auto manufacturers presented the new and innovative hybrid automobiles that offered the option of an electric motor with a gasoline-driven one. U.S. energy companies began seeking out new oil resources, and “fracking” became a common term as natural gas became another alternative fuel.

As demand for foreign oil began to decline, the Middle-Eastern cartels changed strategy and began churning out oil to full capacity. The glut of oil supplies caused an inverse reaction with supply now exceeding demand exponentially. As is the case in a free market, oil prices began falling with no floor in sight. Complicating the issue is the new trade deal with Iran, in which the country hopes to sell its massive stores of oil that have been kept from the market due to a decades-long embargo. A boost in supply has become a bulldozer.

What does this mean for the consumer? Are rock-bottom oil prices going to give the economic boost for which the country has been hoping? The answer, which should be “yes”, unfortunately carries some negatives. Oil rigs, developers and distributors who cranked up production during the years of high prices now find themselves struggling to stay afloat. While the average consumer may see this as something that cannot outweigh the advantages of the lower prices at the pump, the truth is that some of the nation’s largest banks are carrying some very large loans to these oil producers. As federal regulations require banks to keep large sums of cash in reserve as a protection against the threat of these loans going into default, these loan loss reserves can severely limit the amount of money these bank will have available for loans that spur economic growth, such as commercial, home and automobile loans.

So, is it time to panic? This author says no, but it is definitely time to be prepared. One way to stay ahead of the game is to continue to enjoy the prices at the pump, but be more vigilant in doing what the banks are doing – putting more cash into “reserve” or savings and pay a little extra on credit card bills if possible. Small endeavors can reap rewarding results.

Janice Barrett is a freelance writer who frequently writes on topics relative to business and the economy. She has also written feature articles on subjects such as health, childcare, agriculture, skincare, and historical events.

She lives with her husband on a 60-acre farm in Arkansas.

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