Are Low Gas Prices Good For The Economy?

Janet HayesAfter averaging more than $100 per barrel for almost 4 years, crude oil prices recently dipped below $40 per barrel for the first time since 2009 before finally settling around $45.  The decline in price is largely attributable to weak demand globally and surging production in the United States.  It has generally been thought that lower energy costs would have a positive impact on the U.S. economy, but the billions of dollars in reduced energy investment ripples through many different industries, from manufacturing and heavy equipment to financial services, commercial real estate and housing.  There are indications that, up to this point, the declining investment in the energy sector may have more than offset the benefits of lower gasoline prices to consumers.  

Goldman Sachs estimates that a decline in energy related investment, such as new drilling equipment, was responsible for an estimated reduction of about one half percentage point of economic growth during the first half of 2015.  Other estimates are as high as three-quarters of one percent.  Spending on mining exploration, wells and shafts plunged at a 68.3% rate in the second quarter, the largest decline since the second quarter of 1986.  Goldman further estimates that a slower pace of hiring in the oil patch accounts for approximately 20% of the slowdown in total payroll growth this year. Through June the economy added 208,000 new jobs a month compared with a monthly pace of 281,000 over the second half of 2014.  Particularly hard hit have been the states of Texas, Oklahoma, North Dakota, Wyoming, Louisiana and New Mexico.  The decline in drilling activities in those states has impacted the broader economy and affected job growth.

There can be no doubt that millions of American motorists have seen their gasoline bills plummet over the last year. Estimates on savings vary but it is generally thought that consumers could pocket as much as $700 each for the entire year. These savings are beginning to translate into an increase in the level of consumer spending.  U.S. consumer spending, which accounts for two-thirds of economic activity, rose at healthy rate of .4% in August, identical to the .4% gain posted in July. The increase in spending reflected a strong gain in the purchase of durable goods such as autos.  But consumers are not the only beneficiaries of lower energy costs. Clearly, many businesses benefit from lower transportation costs as well as lower production costs.  In fact, the Federal Reserve Bank of Dallas concluded that “despite the growing importance of the oil and gas sector in recent years, the U.S. as a whole benefits from low oil prices”.

Janet R. Hayes 
Leavell Investment Management


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