Impact of Reduced Oil prices on Free Market

Since mid June, oil prices have dropped by 30 %. The latest slump in oil prices came on 25^th November, 2014 (CBC, 2014). The drop was amid the attempt by various economies to negotiate the fuel prices with OPEC countries. The drop in fuel prices is likely to impact on the economy in a big way. Furthermore, there are possibilities that the prices of oil could drop further. The slump in oil prices are as a result of various factors. The most recent is the factor of supply being higher than the demand. This paper analyses the impact of the drop on the free market system.

Oil prices often impact on economies in a big way. Almost every aspect of the economy is dependent on the price of oil. Indeed, reduction of oil rates has often been used by governments to ease the impact of the economy on the common citizen. In this case, oil prices are likely to impact on various aspects of the economy, including the employment rate, investor confidence and the available disposable income.

Drop in fuel prices could increase the amount of disposable income. With the drop in fuel prices, people will spend less on fuel and save the rest. The savings will count towards disposable income. The impact is going to be felt first hand by low and middle income earners everywhere. This will be the first major impact of economic growth that will be felt by this group since the economy started easing back in 2009 (Tomasi, 2012). While the economy has improved slowly since the year 2009, the only significant change that has been felt is with corporate organizations. Since oil prices are felt at the grassroots, the impact will be felt in every section of the economy.

The reduction of oil prices impacts on the demand of goods. With the reduction in the oil prices, the prices of goods are likely to change. Oil prices play an important role in the prices of other commodities (Miller, 2014). When the prices of oil go up, production and transportation costs also go up. As a consequence, the prices of the goods being produced or transported get high. On the other hand, a drop in the prices of oil is likely to impact on the prices of other commodities by making the drop. This way, the products become more affordable hence making the demand of such prices to go higher.

The demand for luxury goods will improve. As noted above, the prices of goods will impact on the purchasing behaviors of people. However, this is not only in one dimension. As people are able to purchase more with little money, people tend to spend on commodities that they consider luxuries (Bremmer, 2010). On that note, it is important to note that the change in oil prices has come at a time when most people are preparing for their December holidays. This will mean that more people will have funds available to spend on holiday destinations and luxury gifts. The industries that produce or market such goods are likely to benefit.

One sure corporate beneficiary of this change in oil prices is technology. The demand for technology products is going to improve. Specifically, mobile phone manufacturers are likely to benefit from the availability of funds (CBC, 2014). As people get more money to spend, there is a likelihood that they are going to upgrade their mobile phones. The mobile phone industry has been changing a lot easily. It has been the nature of the industry to nurture a tendency of changing the mobile devices at least once yearly. With the recent releases of new products by the big companies like Samsung and Apple, the industry is likely to be heavily impacted. On the other hand, the retail industry is going to be similarly impacted courtesy of the holiday season.

The hotel and hospitality industry will be impacted by the aspect of both availability of funds and time. As more people became able to spend time to spend traveling, they are likely to spend that time in hotels. The hotel industry is however likely to charge more expensively in  a bid to get only quality customers and to reap heavily from the season, as a consequence, since the production cost will be lower and the demand of services high, such companies will benefit heavily from the industry.

The prices of oil will also impact on the rate of unemployment. With improved spending habits, companies are likely to employ more workers to satisfy the demand of goods. As a consequence, the rates of unemployment will drop (Bremmer, 2010). This implies that more people are going to be employed there currently are. On the other hand, a high amount of disposable income will allow people to invest more. In this case, it would be more advisable to invest in those sectors that are being improved by the drop in fuel prices.

On the other hand, since a free economy implies that both the buyer and the seller choose to get involved in business, the choice of fuel will vary. In one category, there are those consumers who will choose to use renewable forms of energy and those who will choose non-renewable forms of energy (Tomasi, 2012). This will be informed by both the cost and the principles. With the drop in the cost of oil, more people will be in a position to their diesel-fueled vehicles. Consequently, the demand for oil will rise. On the other hand, people will be in a position to make installations for renewable forms of energy like solar energy and wind energy. Others will be in a position to buy fuel economic and hybrid vehicles. Overall, the season will lead to an increased usage of both forms of energy.

In a free market, the prices of goods and services are set by consent between both the buyer and the seller. If either of the parties find the prices of the commodities inappropriate, then they may choose not to engage in business. The change in oil prices is likely to impact on the buying capacity of buyers’ money (Bremmer, 2010). There has recently been a drop of about 30 % of oil prices. The oil drop is likely to impact on various sectors of the economy. With reduced oil prices (and consequent reduction in the prices of other commodities), the purchasing habits of consumers will be changed. People will have more disposable income and consequent higher sales in every sector. The corporate sector will also employ more people to meet the higher demand for goods. This will put more income in the hands of consumers, hence, again contributing to increased business activity. Increased salaries are also likely to be experienced as the demand for labor increases.

References

Bremmer, I. (2010). The end of the free market: who wins the war between states and corporations?. European View, 9(2), 249-252. doi:10.1007/s12290-010-0129-z

CBC,. (2014). Oil price falls below $70 US as OPEC leaves output unchanged. Retrieved 28 November 2014, from http://www.cbc.ca/news/business/oil-price-falls-below-70-us-as-opec-leaves-output-unchanged-1.2852187

Miller, J. (2014). Oil Price Drop and Effect Causes. The Energy Collective. Retrieved 28 November 2014, from http://theenergycollective.com/jemillerep/2146151/are-declining-oil-prices-increasing-risks-opec-us-energy-security-or-clean-fuels-

Tomasi, J. (2012). Free market fairness. Princeton: Princeton University Press.