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Frack Baby Frack
How Cheap Energy Helps American Families

Oil and gas prices have fallen quite a bit since the summer of 2014—Brent crude has dropped 66 percent over the past 21 months while the Henry Hub natural gas benchmark price fell 62 percent over the same period. Cheap hydrocarbons can pass savings along to consumers in a variety of ways: oil is primarily a transportation fuel, so Americans will see the effects of a bearish crude market most often at the gas station, but those households that use heating oil will be paying smaller bills in winter months. Natural gas can also be used to heat homes, but unlike oil it’s widely used to generate electricity. Falling natural gas prices therefore cut both heating bills and power bills for millions of U.S. households. Don’t want to take our word for it? The EIA has the data to prove it:

Since June 2014, decreases in crude oil and natural gas prices have reduced household energy costs. According to initial figures from the U.S. Bureau of Labor Statistics (BLS), the chained consumer price index (C-CPI-U) for urban consumers decreased by 1.2% from June 2014 to February 2016. Lower energy prices had a significant impact on this decrease in spite of increases in the food and shelter components of the overall index, which represent larger shares of household expenses. […]

In constant 2015 dollars, average annual household energy expenditures peaked at about $5,300 in 2008. Between 2008 and 2014, average annual household energy expenditures declined by 14.1%. During this period, household expenditures decreased by 17.7% for gasoline, 25.1% for natural gas, and 28.3% for fuel oil. Electricity expenditures declined by a more modest 0.7%.

Those are real, measurable economic boons to the American people, and they come largely as a result of the flood of new American supplies of oil and gas that have helped create dual gluts in oil and gas markets. These new supplies come to us, of course, courtesy of hydraulic fracturing and horizontal well drilling. This is the power of shale.

But that’s not the end of the story. Economists have been puzzled by the fact that the American economy hasn’t benefitted as much as many expected it would, given just how far prices have fallen. Part of this can be put down to the fact that the U.S. energy sector has become an increasingly important part of the overall economy (again, thanks to the shale boom), and while bearish market conditions may benefit consumers, they’re decidedly trying for producers.

There could be something else at work, though. As Quartz reports, consumers may be hesitant to spend their savings earned from falling energy costs because they’re unsure of how long this period will last:

When an income shock is a surprise, people have less confidence it will last, or may fear another shock is coming soon. Since oil prices have trended up since the 1980s, the recent dramatic fall was highly unexpected, so it’s possible consumers don’t totally trust that prices will stay low. Americans surveyed by the Consumer Federation of America last year said they expected gas prices to increase 60% in the next two years and nearly double over the next five. When people think an income boost is temporary, they don’t spend the whole windfall, instead trying to spread its benefits out over time. That could explain the increase in savings we’ve seen.

Cheap energy isn’t producing the kinds of broader positive economic ripples we might be hoping for, but it’s undeniable that it’s saving households around the country a sizable and significant amount of money in a variety of different ways. For that, we have shale to thank.

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  • Jim__L

    “consumers may be hesitant to spend their savings earned from falling
    energy costs because they’re unsure of how long this period will last”

    … and most of that is political, because of the Green agenda (which Obama supports, except when it would be political suicide, which his economic policies would have been had shale not fished his nuts out of the fire). If Obama’s opponents lose influence, everyone expects energy prices to spike again.

    • JollyGreenChemist

      Amen.

  • Jacksonian_Libertarian

    Median Family income has been falling since 2008, and is now down 8%. This means that a large majority of Americans are seeing declining incomes, lost jobs, falling wages. At the same time private debt levels remain at 2008’s high levels, so that Americans are spending an increasing share of their income servicing existing debt. The fall in energy prices is just a minor relief for the majority of Americans who are drowning in debt, barely able to keep their heads above water.

    Economies naturally fall into the deflation trap, when private sector debt reaches unsustainable levels. A vicious cycle is created where lending stops growing, and hence the M3 money supply stops growing. With the M3 money supply stagnate, growth stops from a lack of funding. People become risk adverse, because they are drowning in debt, and the economy is bad. Mediocre Businesses which during a normal inflationary economy could have muddled through, now go bankrupt, their employees can’t pay their debts and they go bankrupt. Bankruptcies, foreclosures, and unemployment, rise to historic levels. Without any inflation interest rates remain low, while the outstanding debts become ever harder to service. And with economic activity stagnate or declining, commodity prices fall. All of which exacerbates the private debt problem which put the economy into the deflation trap to begin with.

    To get out of the deflation trap the high private debt levels that drove the economy into the trap, must be positively effected. Either with inflation that decreases their value and increases the wages needed to service the debt, or by forgiveness of the debt or windfall increases in networth.

    Solution: Payoff all foreign holdings of US Treasuries (~$6+ Trillion), and use the proceeds combined with the $2+ Trillion already in the Federal Reserve from “Quantitative Easing” to create private, inheritable, tradeable, Social Security accounts of ~$30,000, whose principle can never be touched, for every naturally born Citizen (immigrants must fund their own accounts as terms of naturalization). This would create inflation, reverse the trade deficit, increase networth of everyone by $30k, fix the Social Security Ponzi scheme, suck investment capital into the US, put about $9 Trillion in capital into the Stock and Bond markets, make the export sector boom, creating jobs, and getting the economy growing again. This would dig America out of “Great Depression 2.0”.

  • Frank Natoli

    Americans hurt worst by formerly skyrocketing energy prices coincidentally voted in large pluralities for the party determined to strangle carbon energy production with the inevitable and intended consequence of skyrocketing prices. Because those same Americans have little concept of causality, they believed demagoguery about “greedy” Big Oil. Then, thanks to hydraulic fracturing beyond the reach of those elected by those same Americans, supplies increased, prices plummeted, and nobody heard anymore about “greedy” Big Oil.
    Sure would be a better place if people wised up about causality, just a little.

    • CapitalHawk

      They are called “low information voters” for a reason. Universal Suffrage isn’t always so great.

  • Corlyss

    So where’s the money going? Not into the economy, that’s for sure.

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