mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Crude Economics
How Cheap Oil Could Help America in 2016

A barrel of oil is nearly $80 cheaper today than it was 18 months ago, and that price plunge has produced some predictable winners and losers. Big energy importers like Japan are quite happy to snatch up cheap oil and gas in today’s oversupplied market, while petrostates like Russia or any of OPEC’s 13 member countries are unsurprisingly struggling with large budget deficits as they contend with the bearish market.

But for the United States, which in recent years has seen oil production boom thanks to upstart shale producers, the question is a little less straightforward. Cheap oil is obviously painful to the American oil industry, but outside of those companies extracting crude and the firms offering them support, bargain hydrocarbons are a welcome development. As the WSJ reports, the U.S. economy could start really seeing the positive effects of cheap oil in 2016:

The sharp decline in crude prices in the latter half of 2014, and its attendant drop in gasoline prices, was supposed to be a boon for the economy in 2015. Alas, it wasn’t. Instead, sharp declines in oil-patch investment cut into economic growth and people opted to hang onto much of the cash they were saving at the pump rather than spend it elsewhere. . . This time around, those drops in energy costs should provide more of an economic boost.

One reason is that the cuts in oil and gas industry investment spending have been so deep there isn’t nearly as much to trim.  […]

There is likely more pain ahead for oil-industry-dependent workers, but as with oil and gas industry investment, the cuts in the year ahead may not be as deep as the ones in the year now coming to a close. Concurrently, more of the money other Americans have been saving on gasoline may flow through into spending.

When oil prices first started dipping in late summer last year, analysis suggested that it would be a net positive for the U.S. economy. Those gains have been somewhat slow to materialize, but the thinking now is that the oil industry doesn’t have as far to fall in the future. Therefore, there isn’t much more bargain crude can do to offset the boost either that consumers are getting from cheap gasoline or that many U.S. companies are getting from such low prices for such an important input.

There’s no evidence that the global glut in oil is going to go away next year, so it looks like 2016 will be year two of cheap oil. That’s causing headaches for producers around the world, but for the American economy, it could be a powerful, positive force.

Features Icon
Features
show comments
  • Jacksonian_Libertarian

    America is trapped in the destructive deflationary “Great Depression 2.0”. I got there naturally when private debt levels reached unsustainable levels during a period of low inflation, just like all deflations start. Therefore the only way out is for private debt levels to significantly decline, so that people can once again borrow money to take advantage of profitable opportunities. In the meantime any savings in energy costs will be used to service debts just as the $1 Trillion a year in new money the Fed was printing, didn’t cause new loans and stimulate the economy, but rather went to loan payments and into the stock market.
    The Fed has now foolishly raised interest rates, Why? With commodities like energy falling there isn’t any inflation, and the only reason for raising interest rates is to fight inflation from an overheating economy. I doubt anyone thinks the economy is overheating, so this makes no sense. But Bankers love deflation, it makes their entire portfolio of loans grow invisibly in value, even though everyone else suffers poverty, joblessness, foreclosures, bankruptcies, and the loss of the American Dream.

  • Jim__L

    It’s a little crazy that cheap oil (energy) **hasn’t** helped the American economy.

    All this points to a massive economic upswing once we cut down the regulations this idiotic Green administration has imposed.

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