What Are The Implications Of Low Gas Prices At The Pump?

Oil is historically the most valuable fossil fuel that man ever discovered. Notably, the resource forms the main pillars of the combustion engine which powers most of the world’s machines. Interestingly, oil ruled the energy sector until climate activists brought up the debate regarding the harmful emissions from combustion engines.

Low gas prices could lead to oil production cuts

The gases that result from burning oil products like petrol and diesel are quite harmful to the earth’s ozone. As such, there are concerted efforts to move to cleaner sources of energy. However, as more and more cars that roll off the factory move from gas to electricity, the result is too much supply of the resource. As such, the fundamental laws of demand and supply imply that the price of oil will fall.

Falling oil prices come with different implications. On the one hand, lower retail prices mean problems across the oil industry. Notably, the effect runs down from upstream industries to the downstream of the sector. It is to say that less capital will be available for the mining companies to conduct explorations for new sites. Further, the firms may need to tone down their mining activity as deflation bites.

The fall in prices could also lead to increased economic activity

On the other hand, low gas prices at the pump are more like a free pass for more people to put cars on the road. Also, people who have ever dreamt of driving a fuel guzzler will most certainly give in to the temptation. What this means is that there will be elevated levels of carbon dioxide emission from the cars’ exhausts. Furthermore, increased vehicle population on the roads implies roads worn out at a faster rate.

Interestingly, lower gas prices have many more implications, some of them subtle. However, another not so subtle suggestion is job cuts and a decline in aggregate consumption. In particular, the magnitude of such developments on the economy will depend on how much the economy depends on oil for energy provision. Notably, if oil is the largest source of energy in an economy, cheap gas prices will result in higher rates of growth. Interestingly, this will be enough to mask the effects of job cuts in the oil industry.

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