Some people – I suspect oil investors – say that low gasoline prices are bad for the economy. Certainly the DJIA has slipped with the falling prices. I disagree.
While low oil prices may be bad for people who invest in petroleum stocks, and they may be bad for oil producers, I think low gasoline prices are good for the economy. Most of the money spent in this country is spent by the consuming public. These are not people who will say, ‘Hey! I have an extra twenty bucks this week! I’m going to create a job!’ These are people who will either use the extra cash to pay down debt (a good thing), or go out and spend it. Spending money is good for the economy. Moreover, that $20/week makes people feel more confident and they are likely to buy more than they would if they were pumping that cash into their fuel tanks. Again, good for the economy.
Isn’t it usually the other way round? E.g., people think the economy (in China, for instance) is going to slow down and therefore oil prices fall, rather than oil prices fall and therefore the economy slows down.
Lower oil prices are a huge boon to some industries, like airlines.
Certainly lower demand as in, in your example, China, causes lower oil prices. But according to Mr. Liu, the stock market fell because of lower oil prices. I believe that the economy is driven by consumers, rather than investors. The consumers are the ones who buy the thing that the companies that investors invest in make. So while investors are taking a hit, people will be spending more money on goods and services other than fuel for their vehicles – which is good for the companies selling those goods and services.
I’m totally lost by the spin that this is bad for America. Bad for the environment, maybe, but…
Oil is a Factor of Production.
(It effects manufacturing costs, heating costs, transportation costs, etc)
Lowering the cost of a Factor of Production means increased profit per produced unit.
Increased profit in a competitive economy means lower prices and the opportunity to expand production capacity at a reduced cost.
Expanded production capacity requires more hiring and the purchase of capital expansion services.
More hiring means more available jobs where the oil prices are low AND a ripple effect as those workers spend their new wages within the economy.
Yes, people will drive more and wear out their depreciated cars more quickly, leading them to purchase new cars, another ripple effect within the economy.
I think this will be good for most of the US as it frees up money for other consumption. Hopefully the Market won’t get too freaked out by the downturn.
Things might get interesting in Alaska though since a huge portion of our government comes from oil revenue.
The major cause for concern is that the US energy sector has been a major driving force in the economic recovery over the past 5 years or so and it’s somewhat uncertain what will happen if there’s huge layoffs in that sector, which is pretty certain to happen if prices stay low. In previous years low oil prices were unquestionably a good thing for the US economy because we imported most of our oil and so the ill-effects of low prices were felt elsewhere, but that’s not the case anymore.
There are indeed disruptions caused by low oil prices. Two in particular are financial instability in countries where a big part of the national budget is funded by oil revenues or taxes and the increased difficulty for alternative energy technologies to compete on a cost basis. We’ll need those technologies down the road.
But low energy prices are a giant positive overall. Lots of other good things snowball off of cheap and plentiful energy.
That’s obviously not true. They are bad for anyone who directly or indirectly benefits from higher prices. Would low oil prices help or hurt a real estate developer in North Dakota? What about a restaurant worker in Midland?
Lower oil prices are probably a net positive for the U.S. economy. They’re not as big of a positive as they would have been a few years ago, but it is still an overall net positive.
In 2007 gas prices rose dramatically. I remember how people were freaking out. It seemed to me that this freak-out induced people to stop spending. We were already in a housing bubble, and the burst seemed to have happened after several months of high gasoline prices.
It was a two-part statement. Low crude prices and low net fuel prices are two different things, and our economy, especially the parts of it controlled by investors and capital managers, benefits from low crude prices and high net fuel prices.
Lowering net fuel prices is to the consumer’s benefit and a lot of the deliverable product chain, but causes instability in the “big money” world.
Yeah, you’re correct. Lower oil prices are good overall, good for the general economy, and good for us. They’re only bad for the oil industry.
I think the only reason we see so many articles trying to argue otherwise is that the financial press has to write about something on a daily basis. “Lower prices-yay!” just isn’t complex enough to make a good article, so they have to pretend that it’s a much more nuanced view.
There was a long stretch in the 70s and 80s when the price of oil and the economy inversely tracked each other quite well. Oil prices go up: economy goes down, etc.
(Which is why Jimmy Carter needs to be appreciated more. His energy conservation efforts later lead to lower oil prices which helped the economy after he was out of office.)
Then they stopped being so well correlated. Other factors became involved (in particular what kind of weirdness the folks on Wall Street were up to).
The chances are that this will help the economy. But that’s just a better-than-average prediction, not a guarantee.
Oil is not as big a factor in GDP as it was in the 1970s - for example, (in 2009 dollars) in 1978 the GDP of the US was $6.3 trillion, the population was 222 million, and the US used 13 million barrels of oil/day. In 2013, the US GDP was $15.3 trillion, population was 320 million, and the US used… 13 million barrels of oil/day.
We get over twice the GDP for the same amount of oil inputs, so the actual effect of the price of oil on the overall economy has been equally reduced.
This includes price swings… just because the price of gas has fallen by over a dollar doesn’t mean that a lot more people are going to get hired. In 1979, the average new vehicle on the road got 19 miles to the gallon… nowadays, the average new vehicle gets 32 mpg (PDF Cite). Since gas costs about the same (or even less) now as it did in 1978 (gas price in 1979: $.86/gallon. Inflation-adjusted $2.72) while cars are 60% more efficient… the economic gains are just not as positive (or negative) when gas prices swing as they have.
Most explanations of why the DJIA moves one way or another are usually just people trying to sound as if they know why, rather than them actually knowing why. For all we know, the market fell because a lot of people sold their assets to pay for Christmas. I’m reminded of Michael Lewis’s Liar’s Poker where he says that the traders never understood why the market did one thing or another, but that they quickly learned to blame it on OPEC or the Japanese as it made them appear knowledgeable to their clients. Regardless, saying that Cisco or Johnson&Johnson or Nike (all DJIA components) decreased in price because investors were spooked about falling oil prices… there’s not a lot of sense on the face of it, right? (Not saying you can’t build a case… “Nike fell because if oil goes too low too many people will have to save money on their shoes as they’re not making money in the oil business”… but saying that every stock on the DJIA fell on 12-12-14 because of the drop of oil prices is just saying something to get quoted in USA Today.)
If “big money” is spooked by the lowering price of oil it is more likely that they were “spooked” by the IEA report which suggested a possible slowdown in the global economy in 2015, which may be a causative factor in the current supply glut. Since stock prices have a built-in “future earnings” expectation, telling people they might have over-estimated those potential future earnings adds to the pressure to sell.
Gas prices are always lowest in December-February, then rising to mid-summer peaks. (cite, D/L the Excel chart for longer-range data.) Just FYI, though the current situation goes beyond seasonal price activity.
OPEC has admitted twice this week that they can no longer manipulate the oil market as they once had. Take this as you will, but it seems to be a tacit admission that the cartel is no longer all that effective.
All of which is based on standard economic notions that only an economy spinning at a nominal maximum and slowly increasing is “healthy.” Anything else impacts stock prices and investment values, which is unthinkable.
One quote I occasionally reflect on is paraphrased: Look around… Everything you can see, everything you can touch came to you on a truck.
Surely there are many counterexamples, but for the most part this is true. I don’t know what percentage of retail price comes from transportation costs, but if fuel prices drop then everything should get cheaper.
That assumes that each link in the consumer-good chain is willing to give up a price increase they got you to accept from “necessity.” In the long run, yes, competition will pull many prices back down, but don’t look for proportionate falls in shelf goods any time soon after fuel cost drops.