How Cheap Oil Impacts the Economy


How Cheap Oil Impacts the Economy

What happens on Wall Street doesn’t necessarily translate to Main Street. Energy companies are huge players on Wall Street so cheap oil hits them (and the stock market) hard, and the results are gloom and doom economic forecasts telling us disaster is near. However, cheap oil has an impact that goes way beyond Wall Street, and some of that impact is good for businesses and consumers. Here are some ways low oil prices will affect people and businesses, both good and bad, in 2016.

In the short term, low oil prices are good for consumers. Two major benefits are:

  1. Consumers have more money to spend. With cheap gasoline and heating fuel prices, consumers are left with more money to spend on other things, which leads to No. 2…
  2. Consumer goods are cheaper. Basically every product in the market is derived from oil at some point in the supply chain whether it’s an oil derivative such as plastic or the diesel it took to transport the goods to market. And while not all manufacturers will pass along the discount to the end user, odds are that some of the consumer products you’re purchasing will come down in price due to lower oil prices.

For example:

  1. Farmers use lots of fuel and oil in producing crops. Cheap oil results in cheap fuel – gas, diesel and LP – and could translate into lower food prices. Also, a better-than-average growing season in 2015 resulted in record crop yields which has dropped price-per-bushel, so farmers are turning to storing crops to wait for higher prices, but that wait can only last so long. While this may hurt farmers, it could help consumers.
  2. As gas prices fall, people drive more and their tires wear out faster. But since those tires are made from oil they are cheaper to produce, so putting new rubber on your ride doesn’t put as big of a dent in your wallet.
  3. Jet fuel is the biggest overhead expense for large airlines. Last year airline ticket prices dropped more than 5-percent as a result of cheap oil (hopper.com). Prices may drop even more in 2016 if oil prices stay low, meaning cheap airfare and more people planning getaways. (Although some airlines have said they will not pass these savings along to consumers. We shall see.)

Long term, however, low oil prices are not good for the economy and will have negative impacts:

  1. Declining stocks and mutual funds. The stock market typically follows the oil trend so your nest egg may suffer.
  2. Job loss - companies, especially in the energy sector, see reduced profits and revenues and in turn stop investing in expansion and eliminate jobs or stifle job creation. Take our fracking example - fracking is an expensive extracting method and with oil below $40 per barrel it doesn’t pay. As a result, companies such as Halliburton, Royal Dutch Shell and Schlumberger have laid off close to 30,000 workers within the past year.
  3. Recession. It’s the four letter word of economics. Too much inflation is bad for an economy, however, so is too little. Low oil prices can lead to deflation and recession.

 

  1. In 2016, Bank of America Merrill Lynch economists predicted Main Street would fare better than Wall Street in 2016. But some economists fear low prices could lead to consumers waiting for prices to drop even more causing the economy to stagnate.
  2. In 2005 the U.S. met 35-percent of its crude oil needs. In 2015 the U.S. became the largest oil producer in the world, but produced just over half the oil it consumed, about 60-percent. With oil prices under $100 per barrel, domestic production will slow because fracking does not bring returns needed to pay for it.

The coming year will be an exciting one for the oil industry. Just as when oil prices are high, low oil prices will have a direct effect on all aspects of the economy including your business and your own pocketbook. Exactly how that will play out can be predicted, but we don’t know what, exactly, will happen until it does.