Amidst the anxiety over lower oil prices, there are three discrete investment issues

Amidst the anxiety over lower oil prices, there are three discrete investment issues. The first is whether oil market balances warrant lower prices. The second is whether lower oil prices necessarily imply worsening demand in other raw material markets. The third is whether lower oil prices should engender fears of contagion (possibly due to their impact on debt markets, lower than expected capital spending on exploration and development and emerging economy growth rates). Lower prices are justified because of the need to cut capacity by enough to match demand. Prices need to inflict enough pain for this to happen but the required rebalancing could still happen as early as later in 2015 on currently anticipated usage rates. Secondly, lower prices do not necessarily have adverse implications for other raw material markets because halting the price fall requires an industry specific supply side adjustment. Lastly, the contagion risks are probably overstated because they do not take adequate account of the beneficial effects of lower oil prices on economic activity.