Question

identify the key issues of Falling Oil Prices in their Long-term and Short-term Impact on the Ordinary Investor

Answer 1

Reasons of falling oil prices are (1) fall in aggregate demand (AD) in the economy, (2) excess supply of oil in a certain period, and (3) loss of monopoly power of oil producing country or company.

An investor has to focus on the oil price before any investment or expansion.

Issues relating to fall in oil price are as below:

No.1) Investments may not be fruitful if such falling of oil price is due to the fall in AD. If AD falls, people of the economy may not have sound purchasing power. Therefore, whatever products are produced through such investment may not be sold out completely or marketing may be a great issue. If the AD falls because of normal course of business cycle then the issue should remain in the short-run only and there may not be any long-run impact – therefore, investments may be done in the long-run. But if the case is abnormal, like COVID-19 issue, investments in the long-run also may be impacted -- No one knows what the economy will shape and change of taste in near future – therefore, the issue may remain in the long-run as well.    

No.2) Deciding the exact amount of investment is an issue, since getting the reason of fall in oil price is not clear – if it is due to excess supply or due to loss of monopoly power, then these are good for consumers – therefore, investments may not be a problem but if it is due to fall of AD then this might be a recession and a huge investments there may not give returns in short-run as well as in the long-run.