What Does the Low Price of Crude Oil Mean for the U.S. Economy?

American economy is undoubtedly the largest in the world, having more than $17,000 billion worth of production of goods and services annually. Although there is an assortment of factors that kindle the growth of the U.S. economy, 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 like manufacturing activity. Most of such indices move in tandem with energy consumption. 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. The short-term and long-lasting impact of falling oil prices on the U.S. economy must be examined methodically.

 American appetite for energy seems to be insatiable. Although the overall ratio of spending on energy to GDP (Gross Domestic Product) has either dropped or has remained steady in recent decades, such spending, nonetheless, 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 alone, more than 8% of its GDP every year. The U.S. is the biggest consumer of crude oil at 20 million barrels per day, the number one importer of oil, and soon, it is also the biggest producer of crude oil in the world. Almost 45% of daily consumption is produced domestically and 55% imported from approximately 80 countries, most notably the oil-rich OPEC members. According to a report in the New York Times, the U.S. own share of global crude oil production has increased from about 9% of its total in 2008 to nearly 13% today thanks to the booming shale oil industry. Likewise, the per capita consumption of gasoline in America has been reported at 505 gallons per year, 183 gallons in Europe, and 28 gallons in China. Also, 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 of approximately $115 a barrel in September 2014, the price of crude oil has been falling to as low as $43 today (3-19-15) overall average, mainly because of a persistent 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, of course, oil-exporting countries. According to The Economist magazine, cheaper oil prices will cause a shift of as much as $1.3 trillion from producers to consumers. 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% increase in the yearly income of a typical household. Economists at Goldman Sachs estimated that, taken as a whole, U.S. households have already saved approximately $75 billion over the past six months due to falling gas prices and if the trend in decline continues, these savings could amount to $150 billion annually. This enables American consumers to spend more money on food and other products, providing an impetus for business expansion. 

 The shale oil industry, in particular, is one of the negatively impacted industries. According to many analysts, this industry cannot operate profitably at below $59 a barrel, which is considered the breakeven price. The fracking boom over the past few 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 companies to downsize or discontinue operations altogether unless there is a breakthrough in fracking technology. The outcome for the U.S. economy will be quietly consequential if that happens. 

 Decline in the price of gasoline, the main product of crude oil, has a deep impact on auto manufacturers. When gas prices decline, not only does overall demand for automobiles increase, but consumers will also switch back to larger cars like SUVs and other gas-consuming models. That is perhaps why the U.S. data on the sale of automobiles released just a couple of weeks ago showed a strong gain in demand, especially for pickup trucks. Car makers in the United States have to comply with fuel efficiency standards for the automobiles they produce, both trucks and passenger cars. The Obama administration has been adamant in its policy to push for higher efficiency standards, especially after 2010 when the price of gas at the pump surged to about $4.00 per gallon. However, when the price of gas falls, concern for fuel efficiency losses its momentum and this increases flexibility for the administration regarding its energy policy. 

The United States is now considered the 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 Middle Eastern oil, 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. According to another report in The Economistmagazine, “That abundance [and cheaper price] provides the potential for reform. The U.S. government has been ratcheting up its efforts for energy independence after 1973 and the advent of energy crisis.” Accordingly, it has imposed restrictions on exports of oil, natural gas, and other related products. Additionally, massive subsidies and tax breaks are being offered to traditional oil companies and those working on alternative sources of energy. With the low price of oil, it is time for the U.S. government to re-examine its policies and possibly relax these subsidies.