Are stock markets underestimating the impact of falling oil prices?

Much has been said of steep fall in oil prices in 2014. Among the opinions that are voiced many doubt the durability of the decline in oil prices. Some attribute political reasons to it while others feel supply controls would cause a reversal in the decline in oil prices. The fall in oil prices has been so steep and so swift that its enormous impact is still to be comprehended. And hence its impact on Indian and global economy is probably underestimated.

The fall in oil prices could be structural in nature. Like any other commodity oil too has crashed due to excess supply. It is a pure interplay of demand and supply wherein excess supply has come in due to new technologies and additional methods of excavating oil. For people have seen scarcity in oil supplies and oil producers dictating terms and controlling production this sudden change is equation between consumers and producers is indeed difficult to foresee and anticipate.
With benefit of hindsight one can say that cues for oversupply were there since 2010 and visible trends were there in 2013. The following charts from carpe diem blog lucidly tell the story of falling oil prices. America’s shale revolution has sharply increased us crude oil production. Unites States equalled Saudi’s production in 2013 and overtook it in 2014 making it the second largest producer of oil after Russia. America is emerging as a world energy superpower, and going from generations of energy scarcity to a new and exciting era of energy abundance in 2014
As these graphs show that oil prices will remain low for a year at least and that oil prices will not rally back soon.

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