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November 01, 2006
A downside of lower oil prices
Oil prices have been plummeting and have taken gas prices down with them. Clearly, this has made drivers happy. But, as economist Mike Walden points out, there is a negative side to this positive news?
"It always takes an economist to find some negative news out of what appears to be positive," says Dr. Walden, of North Carolina State University. "Yes, there could be a negative side, a negative result. And it could be on higher interest rates.
"Now how would this occur? Well, a significant amount of the cash that oil-producing companies have acquired by selling us oil at higher prices over the past few years, they have taken that cash, those countries, and invested in the U.S. bond market," Walden explains. "What does that mean? Well, that means they are actually supplying savings to the U.S. economy. And that’s helped keep interest rates in the U.S. low. And that’s benefited people who are buying cars and houses and so forth.
"Therefore, if oil prices have gone down, those oil-producing countries … have less cash to buy our bonds," he explains. "That could mean that interest rates in the U.S. could be pushed higher than they would have been.
"You know, this is, I think, sometimes why people call economics the dismal science," he concludes, "because we often find that there is a downside of just about anything that appears to be up."
Posted by deeshore at November 1, 2006 08:03 AM