If you’re a driver, a shipper or an airline, low oil prices sure feel nice. But there are downsides to the recent plunge in oil prices — for the oil industry and for the economy.
Low fuel prices can help boost economic growth by reducing fuel bills and leaving consumers and companies with more money to spend on other things. The problem is this: Two factors behind the oil-price drop — a weaker global economy and a stronger dollar — could hurt the U.S. economy by reducing exports, employment and spending. And all that, in turn, could outweigh the economic benefit of cheaper fuel.
“Initially, (a lower oil price) will provide a boost to an economy that already has some momentum,” says Diane Swonk, chief economist at Mesirow Financial. “It’s like a tax cut. The problem is that it will come back to haunt us in 2015.”
A boom in U.S. oil production, which has helped reduce dependence on foreign oil, has been propelled by high prices. Drilling in some areas of North Dakota and Texas, for example, produces only a slight output per day. If prices fall farther, drilling would have to slow because it would no longer be profitable.
Oil hasn’t fallen quite far enough for that to happen, analysts say. Even the more expensive drilling operations are still profitable when oil sells for $85 a barrel, and oil closed just below $86 on Monday. In general, oil companies would have to expect oil prices to stay below $80 a barrel for many months to scale back drilling plans.
Unless supplies drop, perhaps from a cut in production from Saudi Arabia or OPEC, or a sudden turnaround in the global economy that would increase demand, prices could fall farther.
“It’s problematic,” says Gary Ross, CEO of PIRA Energy Group. “The wake-up call is on its way.”
In the meantime, drivers will be enjoying the lowest gas prices in four years. Tom Kloza, chief oil analyst at the Oil Price Information Service and , says the national average could fall under $3 a gallon before year’s end for the first time since 2010.
When energy prices fall because of rising supplies, it can help the economy. U.S. natural gas prices fell even as the economy was recovering from the financial crisis. Those lower prices helped manufacturers by lowering electricity prices and raw material costs.
And increases in U.S. oil production have protected the U.S. economy by keeping fuel prices from soaring in recent years during a period of turmoil in the Middle East.
