Burst! What impact will the sharp drop in international oil prices have on the economy?

Yesterday, concerns about the demand outlook and the possibility of a ceasefire in the Middle East rose, international oil prices fell sharply, WTI crude oil, Brent crude oil plunged more than 5%. The U.S. Energy Information Administration (EIA) has lowered its Brent and WTI crude oil price forecasts for 2024 and 2025. EIA lowered its 2024 Brent forecast to $81 / BBL and WTI to $77 / BBL. In 2025, Brent crude oil fell further to $78 / BBL and WTI crude oil to $73 / BBL.

The collapse of international oil prices will have many impacts on the economy, one is the impact on the energy industry, the collapse of oil prices will directly affect the profits of oil exploration and production enterprises. Low oil prices may cause these companies to reduce investment, reduce production or lay off workers to reduce costs. At the same time, for countries that rely on oil exports, the sharp drop in oil prices may lead to a reduction in foreign exchange earnings, which in turn affects the country's fiscal position and economic development. The oil price crash will reduce costs for refiners, which could prompt them to increase production or expand sales. For consumers, the plunge in oil prices will lower the price of gasoline, diesel and other petroleum products, reducing transportation costs and living costs.

The second is the impact on oil import and export countries, the sharp drop in oil prices will directly reduce the energy costs of oil importing countries, help ease inflationary pressure, and may stimulate economic growth. Industries that are highly dependent on oil, such as manufacturing and transportation, will benefit from lower oil prices and their operating costs will drop significantly, thus improving the profitability and competitiveness of enterprises. Lower oil prices mean lower travel costs for families, and consumers' purchasing power will increase, helping to stimulate consumption growth. At the same time, for oil exporters, the sharp fall in oil prices will reduce their fiscal revenues, which may lead to slower economic growth or higher fiscal deficits. In order to meet the challenges of lower oil prices, oil exporters may need to adjust economic policies, such as increasing investment in non-oil industries and reducing government spending.

The third is the impact on the global economy, the sharp drop in oil prices may trigger a series of chain reactions, leading to a decline in the global price level and increasing deflationary pressure. It may also affect investor confidence and lead to volatility in financial markets. Financial products related to oil, such as futures, options, etc., may also experience large fluctuations. Falling oil prices may represent a lack of demand, and central banks may need to implement loose monetary policy to ensure that the economy does not fall into deflation. In times of falling oil prices, central banks may lower benchmark interest rates to stimulate economic growth. This helps lower borrowing costs for businesses and individuals, boosting investment and consumption. Although falling oil prices may weaken the competitiveness of new energy in the short term, in the long run, it may prompt new energy companies to increase technological innovation, improve energy efficiency and reduce costs to better compete with traditional energy sources.

The fourth is the specific impact on various industries, the first is aviation, fuel is one of the largest operating costs of airlines. Lower oil prices will lower the cost of jet fuel, helping boost airline profit margins and could prompt airlines to lower ticket prices and spur travel demand. The second is the transportation industry, where fuel costs account for a large proportion of operating costs. Lower oil prices will significantly reduce transportation costs, improve the profitability of transportation companies, and may reduce logistics costs, with a positive impact on the economy as a whole. In addition, the chemical industry, as the downstream industry of crude oil, will benefit from lower oil prices. The reduced cost of raw materials will increase the profit margin of chemical companies, and may cause the price of chemical products to fall and increase market demand.

To sum up, the sharp drop in international oil prices will have a multi-faceted impact on the economy. Governments and businesses need to pay close attention to market dynamics and policy changes so that timely responses can be taken to address the challenges and opportunities presented by the sharp drop in oil prices.