Sunday, November 16, 2008

Impact of falling oil prices

Oil prices continue their downward trend, touching $56 from its July peak of $147. In the US, gasoline prices have fallen by more than half to below $2 for a gallon in some states, from $4.11 a gallon in July. However, the lower prices may not have the desired impact on automobile sales and the wealth effect of American consumers. The cumulative adverse impact of the downturn, with its effect on almost all the sectors, more than offsets any consumer gains by way of declines in energy and commodity prices.

The high oil prices had set off a chain of reactions in the market in search of cleaner fuels and more fuel efficient engines and devices. The high prices had become an effective consumption tax on gasoline and incentivized many positive behavioural changes on consumers. The number of private vehicle miles travelled declined for the first time in decades and public transport systems across many American cities have experienced increased ridership. It was even being suggested that the high fuel prices could spell the doom to the suburban-based American residential culture. The high energy price was good for the environment too, in so far as it had achieved what government policies could not, by way of curbing oil consumption and helping contain global warming.

At the high gasoline prices, bio-fuels suddenly became commercially attractive, forcing American farmers into shifting from corn to soya and Brazilian farmers to clear off large tracts of the Amazon rain forest to cultivate sugarcane. The rise in foodgrain prices was linked to these bio-fuel bubble driven shifts in cultivation patterns.

Now, with oil prices on the way down, all these developments will face the inevitable countervailing pressures. Bio-fuels are surely commercially unviable at these oil prices. All the positive behavioral and lifestyle pattern changes now look unattractive.

No comments: