Low Energy Costs

LowEnergy Costs

LowEnergy Costs

Thetopic on the Wall Street Journal is, “U.S. producer prices fall by0.5% in September 2015 to lower energy costs” (Andrada, 2015).

Theauthor’s central point is the effect of consecutive drops in theprices of energy on production costs and pricing. In fact, the authordescribes the relationship between the demand and supply of oil indetermining the prices in the economy. Besides, the author concludeson the most important drivers of prices in the oil markets (Andrada,2015).

Theconclusion of the author is that general prices have fallen by 0.5%due to the decline in the prices of oil. However, experts expectedthe prices to rise by 0.1%. The forecasts of expectations rely on themechanisms of demand and supply. When there is more demand forconstant supply, the price moves up. Excess supply at constant demandcauses the prices to fall. The experts prediction of high pricesindicates that they expected the demand for oil to rise followed by aless than the increase in supply. However, the prices fell indicatingthat there was an increase in supply with a less than appropriateincrease in demand. The Increased supply was due to theidentification of more oil deposits. The fall in the demand for oilis currently attributable to the generation of more efficient engineswith a lower consumption capacity. Consequently, an increase in oilleads to a less than appropriate increase in the demand. Therefore,prices fall (Andrada, 2015).

Thedrop in the prices of oil leads to a decrease in energy costs formanufacturers. Consequently, they can maintain their margins at thesame production capacity or lower. It implies that the marginalrevenue for products increases than the marginal costs and theoverall level of prices drops (Andrada, 2015).

References

Andrada,N. (2015, Oct 15). U.S. producer prices fall by 0.5 percent inSeptember on lower energy costs. TheWall Street Journal.Web. Retrieved on Oct. 17 2015 fromhttp://www.wall-street.com/2015/10/15/u-s-producer-prices-fall-by-0-5-percent-in-september-on-lower-energy-costs/