$50 Oil Doesn’t Work | Our Finite World

$50 Oil Doesn’t Work

$50 per barrel oil is clearly less impossible to live with than $30 per barrel oil, because most businesses cannot make a profit with $30 per barrel oil. But is $50 per barrel oil helpful?

I would argue that it really is not.

When oil was over $100 per barrel, human beings in many countries were getting the benefit of most of that high oil price:

• Some of the $100 per barrel goes as wages to the employees of the oil company who extracted the oil.
• Often, the oil company contracts with another company to do part of the oil extraction. Part of the $100 per barrel is paid as wages to employees of the subcontracting companies.
• An oil company buys many goods, such as steel pipe, which are made by others. Part of the $100 per barrel goes to employees of the companies making the goods that the oil company buys.
• An oil company pays taxes. These taxes are used to fund many programs, including new roads, schools, and transfer payments to the elderly and unemployed. Again, these funds go to actual people, as wages, or as transfer payments to people who cannot work.
• An oil company pays dividends to stockholders. Some of the stockholders are individuals; others are pension funds, insurance companies, and other companies. Pension funds use the dividends to make pension payments to individuals. Insurance companies use the dividends to make insurance premiums affordable. One way or another, these dividends act to create benefits for individuals.
• Interest payments on debt go to bondholders or to the bank making the loan. Pension plans and insurance companies often own the bonds. These interest payments go to pay pension payments of individuals or to help make insurance premiums more affordable.
• A company may have accumulated profits that are not paid out in dividends and taxes. Typically, they are reinvested in the company, allowing more people to have jobs. In some cases, the value of the stock may rise as well.

When the price falls from $100 per barrel to $50 per barrel, the incomes of many people are adversely affected. This is a huge negative with respect to world economic growth.

If the price of oil drops from $100 per barrel to $50 per barrel, this change adversely affects the income of a large share of people who formerly benefited from the high price. Thus, the drop in oil prices affects the incomes of many of the people listed in the previous section.

Cont......