The past few weeks have brought us good news and bad news on the economical front. In mid-July, unfathomably high oil prices seemed to finally have had an effect on consumer spending.
The accepted model of price elasticity of demand on oil is usually very low, as fossil fuels are deemed a necessity to the modern consumer or business, due to a lack of available alternatives. This is not necessarily a lack of feasible alternatives, but their availability whilst oil is so profitable.
But despite the usual predictability of the crude oil price elasticity model, it is flawed, as consumer attitudes and spending has become much more fragile and temperamental during the credit crunch.
The price of oil reached such a level that actually brought on a drop in demand due to financial constraints, along with the slightly stronger USD. This saw the price of oil drop from its $147 per barrel price tag at the beginning of July, to a recent low of $112. This drop has led to speculation that for the consumer, petrol prices and FMCG prices are to fall as a consequence.
Whilst the current drop in price is the most significant since the start of the Iraqi war (although still twice the cost of when the war began), it’s important not to get carried away here. My qualifications lie in law and business, not economics; however I would be willing to bet my undervalued house that this is merely a temporary slick in the road for the booming oil firms such as BP and Shell.
These fluctuations in the trade price of crude oil are not indicative of where we are headed economically, with the cost of the black stuff expected to make that ground back up, and then some, over the next year. Cited causes are global growth (particularly in China and Japan), and diminishing supplies.
Many hopes of lower living costs were dashed when the major energy companies confirmed more price hikes to ‘combat the rising costs to the energy firms’. Prices are set to rise by as much as 35% as a result.
And so, rather unfortunately, the promise of lower prices is a false one. The reality of the situation is fairly dire, as we are repeatedly told by analysts that things are “only going to get worse before they get better”.
So there you have it, prices continue to rise for consumers despite corporations buying cheaper oil, and all the while oil firms make record profits. Whoever said life was unfair?
If you have any questions, opinions or views regarding the above then please feel free to leave your comments.
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