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Falling oil prices will offset rising US dollar

Friday, February 13, 2015

Significance

Two shocks are hitting the US economy at the same time: a sharp drop in the price of oil and a rise in the value of the dollar. The impact of the drop in oil is different from previous cycles due to the large expansion in US oil production; there will be a benefit to consumers of oil but a drop in capital expenditures on oil exploration and production. The rise in the dollar has already begun to hurt corporate profits, as overseas earnings decline.

Impacts

  • Larger automobiles will be favoured by consumers as gasoline remains low, but will be a drag on finances if oil prices rise.
  • Overseas earnings are less likely to be repatriated, leading to more calls for a tax 'amnesty' on such profits.
  • The debate over Keystone XL may intensify, as Canadian producers become more invested in reducing transportation costs.
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