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Crude Economics
Plunging Oil Prices Are a Boon for U.S. Economy

The price of oil has plummeted since June, and Barclays analysis suggest that’s a net positive for the U.S. economy. The WSJ reports:

Lower prices mean U.S. consumers and businesses will spend less on oil. While the U.S. imports less oil than it did, it is still a net importer oil. That means a lot of the money that would have otherwise gone overseas will be spent instead on U.S.-produced goods and services.

Barclays chief U.S. equity strategist Jonathan Glionna estimates that a 20% decline in gas prices results in approximately $70 billion of consumer savings.

Of course, the big caveat here is the potential effect a low oil price might have on the American shale boom. Booming U.S. crude production is one of the reasons oil prices continue to fall, as it contributes to a global oversupply. But fracking can be expensive, and if crude continues to tumble, some shale plays will cease to be profitable.

For now, the majority of shale production looks safe from the bear market, though that could certainly change. In the meantime, the world’s petrostates, which require a much higher price of oil just to balance their national budgets, are feeling the pinch, while American oil continues to flow and the U.S. economy reaps the benefits. As in the Goldilocks fable, it’s not high enough to fill Putin’s coffers or constrain economic growth, not low enough to seriously impact the shale revolution, but seems to be just right, at least for now.

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  • FriendlyGoat

    1) Some American states are a bit like oil-exporting countries in that their state budgets won’t work so well either with markedly lower oil prices. Our states, of course, may have alternate revenue options that petro-countries do not have.

    2) We may be testing right now to find out how much trader premium has been built into oil prices for years or decades. If, for instance, buyers can buy and producers can sell oil at $80, why have prices been $100 or more for long periods of time. How much extra money did traders help the western world send to the middle eastern region for no real reason except perpetual “uncertainty”? In that regard, how much worse have we made the world of Islam with money for oil over time? (Or, does it go the other way, where lower oil prices simply foment more terrorism from impoverished places which we spend money fighting?)

  • Jacksonian_Libertarian

    This is the way of all commodity markets, feast or famine, as long as there isn’t any Government interference in the free market, the price will rock back and forth between extremes, spending most of its time in the middle balanced zone. Unfortunately for mankind, the uninformed and stupid politicians are always meddling in the markets, and the more important the market, the more likely they are to meddle. Despite the Government Monopoly’s unbroken record of failure at picking winners and losers in the market place, they still find excuses to screw things up and degrade the efficiency of the free market which damages everyone.

  • dude1394

    With Saudis Arabia cutting prices for JUST the U.S., I would seriously entertain a tariff to even out the price dips. At least smooth them out over a year or so.

    We should not let Saudis Arabia shut down our own drilling.

    • wheezer

      the glut of supply will give the commodities traders reason to keep shorting it. Its about freakin’ time oil/gasoline prices are based more on supply and demand anyway.

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