What will happen to the economy if the price per barrel of oil drops?

Answer 1

1) Our trade deficit will go down

2) Savings rate will likely go up

3) Spending on domestic good will go up

4) Manufacturing costs will go down.

Answer 2

Whose economy? The US? Canada? China? Global?

For the US it will tend to be better as the costs of all goods will be cheaper. (Nothing is really made locally from local materials so there is a transportation cost with all goods which is impacted by the price of oil). However this will come at the expense of oil and gas producers in the US as their profits come down. This in turn will cause investors to substitue away from oil and gas stocks to things that can generate a higher return. (Confusing yet?) The difficulty in quantifying an exact effect is trying to determine whether the effect of lower oil prices is a first order (direct effect first derivative) or second or even third order effect.

At a high level you can qualify the effect on an economy if the price of oil drops based on the type of economy. A consumption driven economy will be better of with lower oil prices. A resource production driven economy will be worse off with lower oil price.

Okay one last consideration for this answer: global impacts. As the cost of a good comes down because of lower transportation costs, if the good is manufactured domestically it's good for the domestic economy, but if it is manufactured elsewhere the effect is more nebulous. Why? Well the US will incure a higher trade deficit.

No simple answer really, but if you need one holding all else equal the economy will tend to be better off.

Answer 3

Shockingly, "Oil", "Gas" are not a major component in calculating major "Indicators" within the Economy.

Many have been putting pressure on the Chairman Of the Federal Reserve (USA) Dr. Ben S. Bernake (Keynesian Economist) to include the effect of Oil/ derivatives into the major indicators (like inflation). However, like his predecessor (Alan Greenspan --- All hail Alan Greenspan), he is favoring leaving it as it is. It is justified that this is a "Lagging" indicator, and that the Economy will reflect it if the supply/ demand has a long-term major change. We will see a natural inflation in all other matters such as transportation, and the prices businesses charge.

Additionally, oil barrels are a significant part of the price of oil (supply & demand) ... however, the USA has been punched with another part --- production in to crude oil. The hit on "New Orleans", and the reluctance of many states to allow petroleum operation plants have crushed the supply of petroleum, which is a major part of why gas got so expensive.

Answer 4

That's not the only variable that affects the economy. Overall, lower oil prices is a good thing for the economy, as it lowers transportation and construction prices, thereby making it cheaper for companies to ship items and build anew.

Answer 5

Any drop in the price of goods/services is gegnerally good for the economy; it stimulates spending and fuels the economy. (Pardon pun)

Check out the following website; talks about ELIMINATING the income tax!

Answer 6

I hope that we start becoming more energy independent because we have to. The middle east is a big mess and always will be. We must all drive more economic cars and figure out a new way to power them.