Crude oil prices, as measured by the S&P GSCI Crude Oil index, have been in a slump since mid-June as prices have fallen more than 22 percent through Tuesday’s close. OPEC appears willing to let oil prices fall in order to drive out the competition.
Lower oil prices mean lower sales revenue for energy companies. Energy company stocks have been hit the hardest during the recent market decline.
From late August through last Monday, the Dow Jones U.S. Energy index declined more than 18 percent, with some speculating that the decline in oil prices was a reflection of a weakening global economy and possible deflation.
This begs the question: “What’s better for the U.S. economy, weak oil prices or strong ones?” Strong oil prices mean more profits for oil companies that spend money to drill more wells and hire more people.
On the other hand, weak oil prices mean more savings at the pump by the consumer, thus giving him more available dollars to spend on other goods and services. The answer to the question is likely more dependent on the time period. Low oil prices have an immediate effect on consumers, putting more money in their pockets to spend today, whereas higher oil prices would create more profits for big oil and have a greater impact on the build-out and maintenance of the U.S.’s critical energy infrastructure.