The recent drop in oil prices has been met with a surprising amount of negativity, as if something bad is happening. This strikes me as insane. The world uses 90 or so million barrels of oil a day. The recent $30+ price drop in oil thus equals a world savings of $1 trillion a year.
Sure, oil companies and their suppliers are worse off (and believe me, I care -- a lot of my portfolio was invested in such things when oil started dropping). But the economy as a whole is clearly better off and wealthier.
To understand why, the analysis we need to undertake is an exact parallel of the broken window fallacy analysis. Its sort of a healing window analysis.
After the oil price drop, consumers have a trillion dollars more and oil producers have a trillion dollars less. Even right? Actually, not. Because consumers then spend that trillion on other things. Those other manufacturers and producers get the trillion dollars lost to the oil industry. Still even, right? No. Think of it this way:
Before the price drop
- Oil companies have $1 trillion extra revenue
- Other producers have no extra revenue
- Consumers have 90 million barrels a day of oil
After the price drop
- Oil companies have no extra revenue
- Other producers have $1 trillion extra revenue
- Consumers have 90 million barrels a day of oil AND $1 trillion of extra stuff (goods, service, savings, etc)
The world in the second case is wealthier. And this is assuming all the people involved are private parties. In fact, much of the oil revenue drop comes out of the hands of value-destroying governments so that in fact the wealth increase in the price drop scenario is actually likely even greater than in this simplistic analysis.
Postscript: OK, yes I am ignoring any cost of carbon pollution. But the market is not set up to price that, and readers will know that I am skeptical that the cost is that high. Never-the-less, this is a separate issue that if it needs to be dealt with should be dealt with as a carbon tax on fuels. The price drop should not affect the value of that tax. Or another way to put it, if one thinks the tax should be $30 per ton based on a $30 cost of carbon, it should be $30 per ton at $100 oil and $30 per ton at $60 oil.