• Home  / 
  • Featured
  •  /  Drop In Oil Prices Has Hardly Benefited The US Economy

Drop In Oil Prices Has Hardly Benefited The US Economy

Oil Prices

There is probably one common thing most of the economists had agreed to at the start of the year – a fall in the oil prices might help in the US economy’s recovery.

However, they all seem to be far from being right, as it just hasn’t worked out that way at all.

The economy seems to have almost come to a halt in the January-March quarter, and is expected to grow just slightly in the first half of the year. The reason for this rather disappointing outcome seems to be the fact that two major changes occurred during this period. The first is the sharp cuts in energy drilling, while the second is that despite the savings at the gas pump, customers have decided to cut their spending than increase it.

Currently, gas prices are quoting around the $2.75 mark, which is a staggering $1 lower than what it was a year ago. In January it reached a surprisingly low figure of $2.03 which is the lowest to be seen in a period of five years.

The slump in the prices of oil and gas was expected to fast-track the US economy recovery, by increasing spending power and driving growth. It was also expected to make up for all the damage done to the economy due to the cutbacks in the U.S. oil patch.

A lot of experts have ended on the wrong side by making a prediction that falling oil prices will help the US economy. In fact, the Federal Reserve Chair Janet Yellen had said in December that falling oil prices will be good for families throughout the country. It’ll almost be similar to a tax cut which would boost their spending power.

Some other experts had given out a more direct statement, with Chris Lafakis of Moody’s Analytics saying in January that lower oil prices would mean a healthier US economy. However, as we know by now, it has hardly turned out that way.

So why did all their predictions go wrong?

The changes lower energy prices have brought were experienced after the Great Recession. Then hefty sums of money spent by corporations on railcars, drill rigs, as well as steel piping for wells has turned out to be a vital factor in driving economic growth. This is the reason when oil prices fall and energy companies decide to cut spending, the economy tends to suffer.

Talking of the booming period seen in the country’s oil production from 2008 onwards, oil and natural gas production has climbed as much as 75 percent and 30 percent respectively. This has made US the largest combined producer of oil and natural gas in the world. The contribution of oil and natural gas production to the economic output increased from less than a percent in the year 2000 to an impressive 2 percent.

Despite all these positive facts, however, the industry activity has suffered a major setback in the recent months.

Finally, Lafakis has agreed to the disappointing outcome. He said that till this point, it is fair to conclude that they have been more hurt than helped.

About the author

Warren Simons