Oil prices continue to slide down, reaching a five-year low of $45 a barrel on Monday.
The slip in prices is due to decreased demand by some of the world’s largest economies coupled with an overabundance of oil supply thanks to OPEC’s refusal to curb production and the United State’s own oil boom flooding the global market. The Deseret News National reported on the causes of falling oil prices in October 2014.
“That’s good economic news for the United States, even if it ends up meaning a serious hit to the shale drilling bonanza,” reported Politico. “Whether you cheer or boo the plunge, though, depends a lot on where you live and what work you do.”
The free-fall of oil prices will affect these 10 facets of the economy, for better or for worse.
1. The environment
Falling oil prices are a bad thing for the environment “because cheaper oil means fewer incentives to develop alternative and less carbon-intensive sources of energy,” reported The New York Times.
It will also reduce incentives to develop new oil and gas fields, according to The Wall Street Journal. Reduction in energy research and development will hurt companies and induce higher costs once oil prices rebound.
2. The automobile industry
The automobile industry may benefit from dropping oil prices. A surge in jobs and more income from lower gas prices gives Americans the wherewithal to buy a new car, perhaps for the first time in a decade, said Kevin Book, managing director of research at ClearView Energy Partners, on The Diane Rehm Show. “The auto industry is booming.”
Lower oil prices will benefit farmers and will eventually benefit consumers as food prices drop. “Agriculture is very energy intensive,” said Moises Naim, senior associate at the Carnegie Endowment for International Peace, on Diane Rehm. “A dollar of farm output takes 4 to 5 times more energy to produce than a dollar of manufacturing output.”
4. Stock prices
“Falling oil prices are thought to be good for stocks because they stimulate consumer spending and hold down inflation. The lower costs support economic growth, boost corporate earnings and lessen pressure on the Federal Reserve to raise interest rates,” reported The Wall Street Journal.
5. Airline costs
Consumers haven’t seen a drop in airline prices yet. An expert on the Diane Rehm show said this is because airlines buy fuel in advance, so there is a lag in savings when oil prices drop.
But with demand for flying high and the fall in oil prices keeping costs low, airlines are in a profit sweet spot. Nearly all major airlines hit record profit margins during the June through September quarter, reported the Associated Press. "'In a strong demand environment, we don’t plan to go off and just proactively cut fares,' American Airlines president Scott Kirby told investors recently," Quartz reported.
6. U.S. oil industry
“American oil production is soaring, and lower prices could slow production of shale oil, which is expensive and needs higher prices to be profitable,” reported The New York Times’ Editorial Board. Shale oil production and the fracking industries need oil to sell at an average of $60 a barrel to break even. For small companies, that price is much higher.
Therefore, if oil continues to fall, the shale oil industry will suffer. Falling prices affect investment rates, meaning that “the U.S. shale miracle will rapidly turn into a shale bust,” wrote MarketWatch. “With oil down some 40 percent since June, new oil drill programs are being scrapped left and right.” Layoffs and bankrupt oil and oil-contracting companies are the next steps in a suffering oil industry.
7. Manufacturing sector
“As low prices bite even more, segments of the economy that enable drilling, like the companies that build pipelines and pumps and drilling rigs, will curb their own investment," Politico reported. "In the worst case, even existing equipment would be left idle, further reducing industrial activity. These pullbacks would reverberate well beyond the oil industry itself, into areas such as steel, cement, and other fields that supply the oil industry.”
8. Consumer spending
Spending less at the pump gives Americans a “massive transfer of wealth to consumers thanks to dropped prices. They will have $110 billion more to spend across the economy,” said an expert on Dian Rehm. This will be a boost to the entire U.S. GDP and economy.
While consumer spending hasn’t ticked up yet, economists are optimistic for the best holiday shopping season since the recession and for spending to continue beyond the New Year, explained The New York Times.
9. State economies
The impact of falling oil prices all depends on location. Oil producing states like Texas will suffer and employment rates will fall “by more than a full percentage point in Wyoming, North Dakota and Oklahoma,” Politico reported. On the other hand, states that consume more oil than they produce, like California, will experience an economic boom.
10. Global economy
“Japan, Italy and Greece are all in recession. China is slowing down, according to its official statistics, and even more according to the whispers. Germany, France and the Netherlands are all at stall speed,” said MarketWatch. If important U.S. trade partners slip into recession, this country’s economy will suffer from diminished demand.
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