PER 2015
price did not go up to the previous level again, but stayed at around $60 until now.
What does a low oil price mean? Let’s start with Europe first. Except Norway and Denmark, most countries in the EU are oil net importers. This means every dollar drop in oil price can show improvement in billions on trade balance, which can further boost the manufacturing sector, create employment and ensure a strong economic recovery. Consumers can benefit immediately from falling cost of fuelling their cars and heating their homes, therefore enjoying greater real incomes and improving living standards with the same wage level. Investment in certain industries which are reliant on oil products may be encouraged as a result of declining cost of production. Nevertheless the main problem is whether these are all going to happen if the economy would inevitably fall into deflation with the current oil price. With the falling price level, the propensity to consume is low, so the economy can easily fall into recession, and we would not usually expect deflation during sustained economic growth. It is the human nature to demand higher earnings every day, therefore inflation is inevitable and generally healthy under the free market mechanism. Capital-intensive industries may struggle, at least in the short-medium term, as real value of capitals rises during deflation, and they benefit to a lesser extent from falling wage level, if there is one. If companies fail to sell their products in a greater quantity, together with capital depreciation they would find themselves in harsh situations in the market competition. Currently in Europe for most countries the economic recovery is already fragile with weak demand and close to zero interest rate (0.05% for ECB), monetary instruments cannot be used to boost demand in order to prevent a possible deflation, which can make the situation more critical. Now let’s look at America. The US economy contracted by 0.7% in Q1 2015, despite a healthy 2.4% increase of GDP in 2014, due to a protracted labour dispute on West Coast, which snarled international trade at seaports handling about $1 trillion worth of cargo annually. As a new contract has been signed between companies and the worker’s union, the economy is likely to reverse in the rest of the year. The consumer spending has bounced back after the influence of bad weather last winter. Nondefense capital goods orders excluding aircraft, a closely watched measure for future business spending plans, rose 1.0 percent in April after an upwardly revised 1.5 percent increase in
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