The Price of Oil Continues to Plummet, Markets are Shaken, Russia Raises Key Interest Rate to 17%, Should We Be Concerned?

The price of oil has plummeted since June 2014.  Brent crude oil went from over $110 per barrel to about $61 per barrel, a remarkable drop of close to 50%.  Its impacts are being felt around the world and watched closely by governments, central bankers, financial markets, analysts, investors, and others.  Let’s look at (1) the reasons that help explain this precipitous decline in oil prices, (2) some of the impacts felt around the world, and (3) whether American citizens should be concerned.  Let’s start with the reasons for the huge drop in oil prices that has occurred in the last six months.

Markets are affected by a number of factors.  But, two of the most important factors are: (1) economic freedom vs. government regulations, and (2) supply and demand.

In the oil market, the supply of oil has increased substantially.  Increased supply usually translates into lower prices.  Why has the supply of oil increased?  For one thing, we can look to Texas in 2008.  That’s when drilling started for shale oil in the Eagle Ford Shale.  Hydraulic fracturing technology helped America produce nearly 9 million barrels of oil a day.  Hydraulic fracturing has been a boom to oil production.  It also meant America was able to cut OPEC oil imports by about 50%.

Another source of oil has been Libya.  While analysts believed that internal problems would limit their production to a few hundred thousand barrels per day, Libya has overcome their issues and expect to produce about 1 million barrels a day by the end of 2014.

While supplies have been increasing, demand for oil in Europe and Asia has been declining.  Growth in China, Germany and other countries is cooling, so less oil is needed.  Another factor is the strength of the U. S. dollar.  When the U. S. dollar is strong, other currencies are relatively weaker.  In some Asian countries, the weak currencies mean consumers pay more for gasoline.  Then, typically they cut their purchases and demand drops.  Added to this is the fact that many countries are simultaneously cutting energy subsidies.  To take an example, India’s diesel subsidies helped fuel (pun intended) a large demand for diesel fuel.  But, India has curtailed those subsidies.  Not surprisingly, diesel demand in India has plateaued.

On Monday, the Russian ruble was impacted by the drop in oil prices along with other factors.  The ruble hit a record low.  This Monday was its lowest one-day decline since back in 1999.  It now takes 65 rubles to buy $1 versus earlier this year when 33 rubles were required to purchase one dollar.  Russia’s central bankers raised a key interest rate to 17%.

If you follow the stock market, the Dow Jones dropped over 300 points last Friday and nearly 100 points on Monday, probably because of worries about the impact of oil prices related to global growth.

Should American citizens be concerned?  Yes, of course, they should.  What can be done?  Implement a Ronald Reagan type economic growth program.  America experienced enormous growth and prosperity under those policies.  Remember the 17 million new jobs during his administration?  We can return to economic growth and prosperity, if we drop the progressive socialist policies we currently follow and replace them with:

1. Fiscal policies that cut growth in government spending

2. Tax policies that cut the marginal tax rates on labor and capital

3. Regulatory policies that cut the number, scope and complexity of regulations  impacting economic growth

4. Monetary policies that moderate the growth rate of the money supply.

For more information on economic freedom. economic growth, and empowering prosperity, please read my new book Renewing America and Its Heritage of Freedom.

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