Falling Crude Oil Prices' Impact on U.S. Economy
Reza Varjavand
Chicago Tribune
The American economy is undoubtedly the largest in the world. Although there is an assortment of factors that kindle its growth, the contribution of energy must not be overlooked. Energy consumption is closely associated not only with economic growth but also with improvement in many other crucial economic indicators such as manufacturing activity.
The unprecedented decline in recent months in the price of crude oil, the key source of energy, has taken many analysts as well as economists by surprise. This price decline has created opportunities as well as threats, resulting in many gainers but also some potential losers. Let's look at the short-term and long-lasting impacts of falling oil prices on the U.S. economy.
Americans' appetite for energy seems to be insatiable. Although the overall ratio of spending on energy to gross domestic product has either dropped or has remained steady in recent decades, such spending still takes a considerable portion of household budgets. Spending on energy remains a key determinant of standard of living and a crucial component of manufacturing expenses.
The United States spends nearly $1.5 trillion on crude oil, more than 8 percent of its GDP every year. The U.S. is the biggest consumer of crude oil in the world at 20 million barrels per day, the No. 1 importer of oil and soon it will be the biggest producer of crude oil in the world, if it's not already. Almost 50 percent of daily consumption is produced domestically, and 50 percent is imported from approximately 80 countries, most notably the Organization of Petroleum Exporting Countries (OPEC).
The U.S. share of crude oil production has increased from about 9 percent of the world's total in 2008 to nearly 13 percent today thanks to the booming shale oil industry, according to a report in the New York Times. The per capita consumption of gasoline in America has been reported at 505 gallons per year, 183 gallons in Europe, and 28 in China. And per capita consumption of electricity in the U.S. is 13,000 kwh compared with 6,000 and 2,600 for Europe and China, respectively.
Since its peak at about $115 a barrel in September 2014, the price of crude oil has fallen dramatically and is now about $47, mainly because of a gap between global demand and supply. The influence of falling oil prices on the U.S. economy is, of course, a mixed blessing — good news for American consumers and oil-sensitive industries such as transportation, airlines, and manufacturing but bad news for oil producers and oil-exporting countries.
Cheaper oil prices will cause a shift of as much as $1.3 trillion from producers to consumers annually, according to The Economist magazine. The average American consumer who spends $3,000 a year on gasoline may save as much as $1,000, the equivalent of about a 2 percent increase in the yearly income of a typical household.
Economists at Goldman Sachs estimated that U.S. households have saved roughly $75 billion over the past six months due to falling gas prices, and if prices continue to decline, the savings could amount to $150 billion annually. This enables American consumers to spend more money elsewhere, providing an impetus for business expansion.
The shale oil industry, in particular, is one of the industries impacted negatively by falling oil process. Many analysts say the industry cannot operate profitably at below $60 a barrel, which is considered the break-even price. The fracking boom in recent years has attracted a massive amount of financial and real resources into shale oil production.
If low oil prices continue for an extended period of time, there might be a massive withdrawal of these resources from the industry, forcing shale oil companies to downsize or discontinue operations unless there's a breakthrough in fracking technology. The outcome for the U.S. economy will be quietly consequential if that happens.
Declining gasoline prices has a deep impact on auto manufacturers — overall demand for autos increases, but consumers will also switch back to larger vehicles that get less gas mileage. Perhaps that's why the recent U.S. data on auto sales showed a strong gain in demand, especially for pickup trucks.
U.S. auto companies have to comply with fuel efficiency standards for their vehicles. The Obama administration has been adamant in its policy to push for higher efficiency standards, especially after 2010 when the pump price surged to about $4 per gallon. However, when the price of gas falls, concern for fuel efficiency loses its momentum, increasing flexibility for the administration's energy policy.
The U.S. is destined to become the world's largest producer of crude oil, unseating Saudi Arabia. In addition to the boom in fracking, the American government has historically done an effective job of promoting public awareness and addressing environmental concerns, thus diminishing the country's dependency on oil from the Middle East, the most volatile region of the world.
Lower energy prices should also offer a momentous opportunity for the U.S. government to rethink its energy policy, which has imposed restrictions on exports of oil, natural gas and related products.
Additionally, massive subsidies and tax breaks are being offered to oil companies and those working on alternative sources of energy. With the low price of oil, it's time for the U.S. government to re-examine its policies and possibly relax these subsidies.
Reza Varjavand is an associate professor of economics and finance at the Graham School of Management at Saint Xavier University in Chicago.
Chicago Tribune
The American economy is undoubtedly the largest in the world. Although there is an assortment of factors that kindle its growth, the contribution of energy must not be overlooked. Energy consumption is closely associated not only with economic growth but also with improvement in many other crucial economic indicators such as manufacturing activity.
The unprecedented decline in recent months in the price of crude oil, the key source of energy, has taken many analysts as well as economists by surprise. This price decline has created opportunities as well as threats, resulting in many gainers but also some potential losers. Let's look at the short-term and long-lasting impacts of falling oil prices on the U.S. economy.
Americans' appetite for energy seems to be insatiable. Although the overall ratio of spending on energy to gross domestic product has either dropped or has remained steady in recent decades, such spending still takes a considerable portion of household budgets. Spending on energy remains a key determinant of standard of living and a crucial component of manufacturing expenses.
The United States spends nearly $1.5 trillion on crude oil, more than 8 percent of its GDP every year. The U.S. is the biggest consumer of crude oil in the world at 20 million barrels per day, the No. 1 importer of oil and soon it will be the biggest producer of crude oil in the world, if it's not already. Almost 50 percent of daily consumption is produced domestically, and 50 percent is imported from approximately 80 countries, most notably the Organization of Petroleum Exporting Countries (OPEC).
The U.S. share of crude oil production has increased from about 9 percent of the world's total in 2008 to nearly 13 percent today thanks to the booming shale oil industry, according to a report in the New York Times. The per capita consumption of gasoline in America has been reported at 505 gallons per year, 183 gallons in Europe, and 28 in China. And per capita consumption of electricity in the U.S. is 13,000 kwh compared with 6,000 and 2,600 for Europe and China, respectively.
Since its peak at about $115 a barrel in September 2014, the price of crude oil has fallen dramatically and is now about $47, mainly because of a gap between global demand and supply. The influence of falling oil prices on the U.S. economy is, of course, a mixed blessing — good news for American consumers and oil-sensitive industries such as transportation, airlines, and manufacturing but bad news for oil producers and oil-exporting countries.
Cheaper oil prices will cause a shift of as much as $1.3 trillion from producers to consumers annually, according to The Economist magazine. The average American consumer who spends $3,000 a year on gasoline may save as much as $1,000, the equivalent of about a 2 percent increase in the yearly income of a typical household.
Economists at Goldman Sachs estimated that U.S. households have saved roughly $75 billion over the past six months due to falling gas prices, and if prices continue to decline, the savings could amount to $150 billion annually. This enables American consumers to spend more money elsewhere, providing an impetus for business expansion.
The shale oil industry, in particular, is one of the industries impacted negatively by falling oil process. Many analysts say the industry cannot operate profitably at below $60 a barrel, which is considered the break-even price. The fracking boom in recent years has attracted a massive amount of financial and real resources into shale oil production.
If low oil prices continue for an extended period of time, there might be a massive withdrawal of these resources from the industry, forcing shale oil companies to downsize or discontinue operations unless there's a breakthrough in fracking technology. The outcome for the U.S. economy will be quietly consequential if that happens.
Declining gasoline prices has a deep impact on auto manufacturers — overall demand for autos increases, but consumers will also switch back to larger vehicles that get less gas mileage. Perhaps that's why the recent U.S. data on auto sales showed a strong gain in demand, especially for pickup trucks.
U.S. auto companies have to comply with fuel efficiency standards for their vehicles. The Obama administration has been adamant in its policy to push for higher efficiency standards, especially after 2010 when the pump price surged to about $4 per gallon. However, when the price of gas falls, concern for fuel efficiency loses its momentum, increasing flexibility for the administration's energy policy.
The U.S. is destined to become the world's largest producer of crude oil, unseating Saudi Arabia. In addition to the boom in fracking, the American government has historically done an effective job of promoting public awareness and addressing environmental concerns, thus diminishing the country's dependency on oil from the Middle East, the most volatile region of the world.
Lower energy prices should also offer a momentous opportunity for the U.S. government to rethink its energy policy, which has imposed restrictions on exports of oil, natural gas and related products.
Additionally, massive subsidies and tax breaks are being offered to oil companies and those working on alternative sources of energy. With the low price of oil, it's time for the U.S. government to re-examine its policies and possibly relax these subsidies.
Reza Varjavand is an associate professor of economics and finance at the Graham School of Management at Saint Xavier University in Chicago.
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