Business

Why High Oil Prices Matter

posted by Chris Valentine
Why High Oil Prices Matter: the livelihoods of countless families around the globe

Photo by CC user sundem on Pixabay

As investment experts in oil industry understand, there are many ways in which consumers and the economy as a whole are affected by high gas prices. Even if you are living a very simple lifestyle in a warm climate without a car, you are impacted by the price of oil and gas, whether it goes up or down. This creates a complicated picture for those interested in investment in the oil industry, which is why you should always get expert advice from professionals like JBH Consulting Group.

Direct Impact

For many of us, eliminating our use of cars for transportation is not an option – we can try to reduce our gas usage by taking public transit, carpooling, by getting a smaller car, or simply not driving as much. However, for most of us there comes a point when we simply can tighten the gas-belt any further – it just isn’t practical to take public transit with 3 children and a stroller in tow. Similarly, if you live in a cold climate, you can make sure your home is weather-proofed and that your furnace is regularly serviced so that it runs efficiently – but realistically, you will need to turn up the heat as the temperature goes down.

Indirect Impacts

Economic Growth – Some companies reap significant profits when oil prices rise. However, high oil costs have many spill-overs into economy as a whole. Anything that requires energy inputs or transportation will become more expense to make or move, and while businesses may be able to absorb those costs in the short-term, they will eventually have to pass those costs along to the consumer. As prices on necessary goods and services increase, this leaves a smaller portion of disposable income for discretionary spending. And, as spending goes down, businesses begin to struggle. This leads eventually to layoffs and closures, which means that workers, who are also consumers, have even less money to spend.

Government Revenue – The decline of both business income and personal income described above hits government directly in the form of demands for increased social spending on subsidies, welfare and unemployment assistance. However, the government’s largest sources of income – direct taxes (in the form of personal and corporate income taxes) and indirect taxes (in the form of taxes on the sale of goods and services) – is also declining at the same time.

Innovation – On one level, high oil can spur investment in new technologies or more efficient processes to compensate for the increased cost of oil. However, in the short to medium term, the research and development budgets of companies may be taken over by increased costs of doing business, leaving less for innovation.

Of course, the story is not all about doom and gloom. High oil prices can also attract heavy investment that might not be attractive at lower prices, and this in turn can fuel both innovation and energy security in the long run. The development of new technologies to extract oil resources that might otherwise not be economically feasible at lower prices becomes an option as prices increase.

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