mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Crude Economics
What Does Cheap Oil Mean for the US Economy?

When the bottom fell out of the global oil market last fall, analysts wondered what cheaper crude might mean for the American economy. On the one hand, the bearish market threatened to contract the booming shale industry, whose relatively high costs made it less competitive in an oversupplied market. On the other, cheap energy is generally favorable to just about every other sector of the economy not involved in its production. Analysis from Barclays suggested that the price plunge would be a net benefit to the American consumer and by extension the economy. But as the WSJ reports, the numbers so far don’t bear that out:

[T]he sharp decline in drilling activity has led to a drop in investment and a weakening in the jobs market that has swamped the benefits of lower oil prices…Absent the decline in investment in mining exploration, shafts and wells—a category that is almost entirely oil and gas-related—gross domestic product would have grown at a 0.4% annual rate in the first quarter rather than contracting by 0.2%. […]

…[T]here have been spillover effects into all kinds of other jobs. One way to see this is by looking at jobs in the states of North Dakota, New Mexico, Oklahoma, Texas and Wyoming. Excluding the mining sector (again, mostly oil and gas), these states added a combined 112,500 jobs in the five months through May,—down sharply from the 236,000 added in the five months before that.

In other words, the ripple effects from bargain oil prices have resulted in a surprisingly high number of jobs lost, not just in the oil extraction sector, but also in the various industries that support that process. That said, there may be better days ahead:

Federal Reserve data released last week showed that the sharp downdraft in drilling activity eased in June. And after falling by more half in the first six months of the year, Baker Hughes’s weekly count of U.S. oil rigs has just leveled out…Layoff announcements in the energy sector have also fallen back lately. And [Goldman Sachs economist Zach Pandl] calculates that, adjusting for seasonal swings, initial claims for unemployment insurance in the five states above have also cooled off.

The U.S. oil industry has had to tighten its belt to stay profitable at $50-55 per barrel crude, and shrinking margins are taking their toll on our GDP. That said, shale production hasn’t crashed in the way the Saudis and the rest of OPEC’s petrostates may have been wanted, and companies are experimenting with new techniques to get more oil out of the ground for less money and time invested. It’s not inconceivable that the industry could grow comfortable with today’s prices as it continues to innovate new modifications to what is still a fledgling combination of drilling techniques. If and when that happens we could see oil production growing while the rest of the economy enjoys cheap prices—in other words, we could soon be able to have our cake and eat it, too.

Features Icon
show comments
  • Andrew Allison

    On the other hand, how would the overall economy look today if the price of oil had not declined? Could it not be that the oil price effect is the only thing keeping the slowest recovery on record from ending completely?

    • Josephbleau

      Hear Hear! Low cost overseas oil just deflated the bubble of Shale, a good thing. Now for some medium term stability.

  • qet

    This highlights both the formal problem with our economic measurements–that they are increasingly useless–and the material problem with our entire economy–that it is no longer based on production. Naturally the drop in price resulted in less production, which is readily measureable according to the old measures as are its collateral effects. Both the primary and collateral effects are on producers–production declines, meaning producers are not producing. Jobs entailing production or supporting it are lost. But every one of those unemployed is also and always a consumer, and so there is a feeling that somehow the benefit to him from the lower price must offset the loss of his income from producing. Our economic measures cannot yet capture this impossibility, having been designed to measure real production and not the phantom production that presents itself as ease in consumption; so we are reduced to measuring “good news” by a decline in the rate of jobs lost and then wildly speculating that somehow advances in technology will brig back both full employment and keep prices low.

  • Kevin

    I still think there would be a benefit to the country of a protective tariffs on oil, using any revenue to offset payroll taxes.

  • FriendlyGoat

    There is a lot to be said for 1) American people paying less for energy, 2) American business paying less for energy, 3) People and businesses in other difficult economies paying less for energy 4) Putin receiving less for energy, 5) The world of Islam receiving less for energy.

    • Josephbleau

      Yes on all.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service