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You’re paying less at the gas pump — and the U.S. economy is paying for it

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Written by Thomas Heath

Click HERE to Read the Article by the Publisher.


This is a good news, bad news story.

The good news: Oil prices are half of what they were about two years ago, giving Americans a holiday at the gasoline pump.

The bad news: The American oil industry got whacked for its own efficiency.

The fracking era helped U.S. oil production nearly double compared with what it was just five years ago. U.S. production went from around 5 million barrels a day to nearly 10 million, almost as much as its peak around 1970.

That brought new life — profits, jobs, investment — to a declining domestic oil industry. Those oil and fracking companies spent billions of dollars to buy steel, machines, vehicles and anything else they needed to feed its growth. It also spurred more tax revenue.

Then oil prices declined because of oversupply. They went from more than $100 in 2014 to around $45 today, give or take a few bucks.

“We were victims of our own success,” said Frank Verrastro, an oil expert with the Center for Strategic and International Studies.

The price drop boomeranged on the oil companies, cutting profits and causing a spending decline on pipes, machines, vehicles and a million other things that go with drilling.

The U.S. economy felt it.

A study by the Brookings Institution said the gas windfall to consumers, which Fed Chairman estimated to be about $700 a family, “raised real GDP by about 0.7 percent since June 2014,” the Wall Street Journal reported.

“However, this stimulus to real GDP growth was largely offset by a simultaneous reduction in real nonresidential investment, reducing real GDP by 0.6 percent,” according to the report.

“The net stimulus since June 2014 has been effectively zero,” according to the report’s authors, Christiane Baumeister of the University of Notre Dame and Lutz Kilian of the University of Michigan.imrs

If the fracking industry had not been so successful in finding oil, and creating a big new industry around it, then foreign suppliers like Saudi Arabia, Venezuela, Nigeria and Canada would have taken the hit from an oversupplied market.

“It makes the economy more vulnerable in the end if you have a bigger domestic oil sector,” Baumeister said. “The moment things are not going well, you feel the disruptive effects. There is more irony. The fact that we are producing more (oil and gas) has contributed to the price decline in the first place. It’s not all of it. But it’s still part of the story.”

Catie Hausman of Michigan’s Ford School of Public Policy wrote a similar paper on the effects of lower natural gas prices on the economy. She and her co-author found that the net benefit to consumers was just shy of $50 billion.

So the good old days when foreign suppliers would take the hit for lower oil and gas prices are gone. “Twenty years ago you could have looked at a drop in prices and say, ‘That is going to be unambiguously good for consumers,’” Hausman said.

Not anymore.

“Clearly, the oil price decline was less than the bonus advertised/believed early on,” Verrastro said.  “We have lost 200,000 jobs and investment is down, meaning prices will rise in the future. When the U.S. was a bigger oil importer, lower prices meant benefits to consumers and balance of trade reduction. As we grew in production, the positive impact of lower prices was ‎more muted.”

Consumers are not the only ones who might be surprised by this turn of events.

“Ironically, in the 2016 State of the Union address, the president talked positively about increased oil and gas production, reduced imports and lower gasoline prices,” Verrastro said. “By the time he leaves the White House, production will be down and imports up — with prices set to follow once the inventory overhang is worked off.”


Tags: oil, gasoline, gas, natural gas


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Written by Thomas Heath

Click HERE to Read the Article by the Publisher.

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