If there was one thing most economists agreed on at the start of the year, it was this: Plunging oil prices would boost the U.S. economy.
It hasn’t worked out that way.
The economy is thought to have shrunk in the January-March quarter and may barely grow for the first half of 2015 — thanks in part to sharp cuts in energy drilling. And, despite savings at the gas pump, consumers have slowed rather than increased their spending.
At $2.71 a gallon, the average price of gas nationwide is nearly $1 lower than it was a year ago. In January, the average briefly reached $2.03, the lowest in five years.
Cheaper oil and gas had been expected to turbocharge spending and drive growth, more than making up for any economic damage caused by cutbacks in the U.S. oil patch.
“Lower oil prices are an unambiguous plus for the U.S. economy,” Chris Lafakis, an economist at Moody’s Analytics, wrote in January.
So what did they get wrong?
It turns out that the economic effects of lower energy prices have evolved since the Great Recession. Corporate spending on drill rigs, steel piping for wells and railcars to transport oil has become an increasingly vital driver of economic growth. So when oil prices fall and energy companies retrench, the economy suffers.
The drilling boom that erupted in 2008 has boosted U.S. oil production nearly 75 percent and natural gas 30 percent and made the United States the world’s largest combined producer of oil and natural gas. Energy production contributes about 2 percent to economic output, up from less than 1 percent in 2000.
For families, the drop in gas prices was an unexpected gift. The government has estimated that cheaper gas will save a typical household $675 this year.
Yet still scarred by the recession, many remain reluctant to spend freely. Analysts also note that Americans are less likely to spend extra money if they think the gain is temporary.
Consumer spending rose at an annual rate of just 1.9 percent in the first quarter, compared with the previous quarter’s 4.4 percent. Much of the cash saved at the gas pump was put away: The U.S. savings rate reached its highest point in more than two years.
For Vince Cimilluca, a 28-year-old video editor in Edison, N.J., lower gas prices haven’t changed his finances much. He’s struggling to pay $800 a month in student debt while saving for a home.
“The extra money that I have I save,” Cimilluca said.
For the economy, the technological breakthroughs that allowed the energy industry to power growth now help explain the slowdown. As the 2008-09 recession ended, companies used hydraulic fracturing, or fracking, to unlock underground reserves. Oil, at $100 a barrel or more, made such efforts profitable.
IHS Energy’s Burkhard estimates that U.S. and Canadian energy companies increased investment in production from $98 billion in 2005 to $363 billion last year. U.S. oil and gas jobs nearly doubled to 537,000. In addition, jobs were added at steel mills, at sand pits to process sand for fracking and at restaurants and service companies.
But the industry’s breakneck growth was thrown into reverse by a 50 percent drop in oil prices from June through January. CEO Doug Suttles of Encana Corp., a Canadian-based driller that has major Colorado operations, says the pullback in drilling “happened more rapidly than I’ve seen in 32 years.”
As recently as December, Suttles says, experts had forecast that the number of rigs would drop by a third in the spring from a year earlier. Instead, it’s plunged by more than half, according to Baker Hughes, an oilfield services firm.
Investment in wells and production facilities collapsed nearly 50 percent last quarter, the government says, and cut the quarter’s annual economic growth by three-quarters of a percentage point.
