How Low Oil Prices Failed To Stimulate The Economy

Tyler Durden's picture

Submitted by Oil & Gas 360, via OilPrice.com,

The 2014 plunge in oil prices was initially hoped to provide stimulus to the U.S. economy, with the Fed arguing that the average household would save $700 in fuel costs. A new paper from the Brookings Institution suggests otherwise.

While higher discretionary income due to lower oil prices boosted consumer spending by 0.61 percent, the collapse in oil drilling reduced total investment by 0.62 percent, almost perfectly offsetting the benefits, according to the report.

Other trends, including an increasing propensity to buy automobiles and a positive change in the U.S. trade balance, had small impacts on the economy while non-oil producing segments of the economy failed to step up their investment levels, according to the report. On the other hand, it also states that there has been no evidence that banks have been forced to tighten credit due to bad loans to oil and gas producers.

Shale Industry Still Critical to U.S. Economy

While this may sound gloomy initially, it also highlights the important role the oil industry plays in the U.S. economy and the positive benefits the shale boom has provided.

“It is readily apparent that without the shale oil boom, the response of the U.S. economy to the recent oil price decline would have been different, if only because of the lower share of oil and gas extraction in GDP. Going forward, one question of obvious policy interest is whether higher investment in the oil sector could help offset the contractionary effect on private consumption of a future recovery of the real price of oil,” reads the report’s conclusion.

In short, the key question is whether the effects of higher investment in the industry will outweigh the negative effects on the economy under an environment of higher prices.

The paper further mentions that in the current environment, persistently higher forecasted oil prices are not required in order for new investments in shale oil to be made, specifically citing the speediness with which unconventional shale oil producers are able to respond to price changes when compared with conventional oil production. More and more companies are attaining 18-month payoff periods and able to hedge significant parts of their production due to steeper decline curves.

The willingness of financial institutions to finance these investments is the big if, of course, although choice assets such in the Permian have had no trouble getting financing from banks or private equity.

Echoes of ’86?

With regards to economic impact, the paper further argues that the current downturn in oil-prices is highly reminiscent of the 1986 decline, which also saw a boost to consumption offset by a decline in oil investment. Of course, oil prices didn’t fall as much in ‘86, meaning E&Ps took less of a hit, and people spent a larger share of their income on gas, meaning consumers had more room to benefit.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Bay of Pigs's picture

That's because food, cable, tuition and a dozen other things are all up in price.

You know.....real inflation.

Stuck on Zero's picture

Anything left over was invested in flipping houses or buying AAPL.

svayambhu108's picture

Low gasoline prices stimulate the economy. Paper oil stimulates only money making robots and algorithms.
Low food prices stimulate the economy.
Lets not forget that the food price rose with energy prices and remained there.

Later edit:
Bay I dind't sse your comment, you nailed it

Francis Marx's picture

How O-bomba care destroyed the economy, thats why cheap oil didnt work! For what many have to pay, they could been making a house or car payment with that.

cheech_wizard's picture

This alone means every Democrat that voted for Obamacare should be hung.

Standard Disclaimer: At the very least, voted out of office.

Pieter Bruegel the Elder's picture

Even an erection on a dead body still makes it a stiff.

Oh regional Indian's picture

Here is a simple answer. Because the lower prices were not a natural result of Suppy/demand factors in oil, but of supply demand factors in fiat.

Thus, people are suffering the same fate fate as the oil industry, in inverse. 

Too much Fiat meets too much oil...

Fiat wins...for now...

 

Next march, 200$ oil...

espirit's picture

$200 Oil won't be so bad.

At least it will worth the while of the roving bands of looters.

GunnerySgtHartman's picture

$200 oil in a failing economy will be a great short play. :-)

LawsofPhysics's picture

The oil itself has great utility.  The issue is in fact with what the oil is priced in.

"King Petrodollar"...

for now anyway...

SheepDog-One's picture

SAVE $700? How much gas do they think people buy? In order to save that much, you'd have to buy about $3,000 worth of gas....wtf?

TheABaum's picture

With a car that averages 25MPG (I get 30 with my Subaru) and driving 20,000 miles per year (way above average) that's 800 gallons per year.

From the highs of $4.00/gallon to the $2.25 that's been the last year's average for me, that's $1400, but that's not the saving because it was 3 and change more than 4.

Meanwhile, utilities went up, cable and cell phone went up, food went up, and of course healthcare went way up.

All savings in gas absorbed by other stuff

 

 

 

espirit's picture

Yeah but, they don't count the things that go up in cost.

i.e. = moving the goalposts.

Goldbugger's picture

All the FEDS horses and all the FEDS men tried to put the economy back to together again.  BUT>>>> it didn't work enen the OIL thing.

TheABaum's picture

Brookings is filled with Keynesians and globalists. Even if they reach the right conclussion, check the reasoning.

jharry's picture

The effect of oil prices will be reflected in inflationary spiral soon. We need stable cheap energy sources to get our economy on track and us out of the Middle  East. Let's try molten salt thorium reactors and/or geothermal energy from Yellowstone.  The more energy our money will buy, the money valuable our money becomes. 

dark pools of soros's picture

'out of the middle east'

 

hahahaha   with Israel and Saud both firmly clawed into the host..  good luck

GunnerySgtHartman's picture

geothermal energy from Yellowstone

I would pay real money to see that happen.  A geothermal energy facility built in a national park?  Can you imagine the apocalyptic screams of doom and gloom coming from the Sierra Club and the Earth First crowds?  It would be fun to see their heads explode!

UnacknowledgedX's picture

Re: “Can you imagine the apocalyptic screams of doom and gloom coming from the Sierra Club and the Earth First crowds?” 

 

As much fun as that might be to watch, it is not necessary. There are other sources of cheap clean energy. Some were classified in the name of National Petrodollar Security. Some were fraudulently declared fraudulent. Some are waiting for funding. What all of these and these and these, cheap energy sources have in common is, they are waiting for the consumer to demand them, using their voices and their wallets. I know this is not going to happen, but if enough people simply refuse to buy petroleum powered autos, and stated loudly and unceasingly that they would buy only Stanley Meyer type water powered automobiles, the manufacturers would have to choose between going bankrupt, or complying with market demand. Unfortunately, most consumers are not aware this choice exists. Add on kits for existing cars could be mass produced and sold at a profit for under $1,500 for an 8 cylinder, half that for a 4 cylinder.  Where is the consumer demand? There must first be consumer education. 

Bam_Man's picture

Sure I save a few bucks each time I fill up.

But here's what I'm now paying annually for INSURANCE:

Healthcare:     $6,700 (with $3,000 deductible)

Homeowners:  $3,900

Auto:              $2,200

That's almost $13,000 a year for INSURANCE. It is more than double what I paid just 5 years ago.

 

 

dark pools of soros's picture

auto & home that high???  you must be in jersey or someother cesspool 

Bam_Man's picture

Florida. Two cars.

Used to live in NJ, and yes, it would be even worse there. Plus property taxes would be triple what I pay here.

Déjà view's picture

Write it off as a 'Charitable' deduction...god forbid if you ever submit a claim...

ACES FULL's picture

Just do what most Northern transplants do when they move down here to escape their screwed up former homes. Take a good look around at all the things you don't like about your new home,get yourself or a fellow Yankee elected to the local council,proceed to pass a ton of new ordinances,codes,etc which in turn will require hiring many more municipal workers to enforce said codes which will result in property taxes skyrocketing and then you're back in the same situation that you tried to escape. Only thing is that now everything is screwed for the locals as well. Good news for the guilty parties is that all this will take a few years to transpire so it will give you Yankees time to find a new well to poison elsewhere. I don't hate Yankees in general,I just hate the bullshit you guys bring with you. Assimilate or leave.

neidermeyer's picture

I'm in Orlando and you are dead on with your assessment... I'm moving to lower Alabama if I can...

silverer's picture

NJ is a good place to be FROM.

brushhog's picture

Wow, you really believe in insurance! I never had health insurance until Obama forced me to buy it. Since he was forcing me, he had to pay for some of it so;

Health insurance ( family of 3 ) $500 per year

Homeowners  $0 ( I own my home outright...I built it, if it breaks I'll fix it )

Auto  $700 ( geico, minimal liability only..I drive a well used truck. If its totalled I'll buy a new one. If its not totalled I'll fix it )

Total insurance...$1,200 per year. A little high for my tastes but I'm willing to pay it for now.

Insurance is gambling. In the long run you will pay more in premiums then you are likely to ever receive in payouts.

venturen's picture

NJ minimum property tax $10k....going to $30k plus and up to $200k for mansions. Even the rich are hurt by this...and why they flee that disaster! 

BabaLooey's picture

"She's dead Jim"

"But Bones! We took everthing and put it to..."

"She's dead Jim...dead"

.............."Enterprise.... 4 to beam aboard"

ajkreider's picture

Perhaps it didn't have a stimulative effect on the economy.  What it did do is reduce the weekly expeditures of hundreds of millions of people, at the expense of a few mega-corporations (and admittedly, some good Texas jobs).  Worth the trade, I think.  Especialy since it forced many shale companies to lower their costs.  Best of both worlds.

David Wooten's picture

"With regards to economic impact, the paper further argues that the current downturn in oil-prices is highly reminiscent of the 1986 decline, which also saw a boost to consumption offset by a decline in oil investment."

The 'paper' is incorrect.  The current downturn in oil prices is due, in a large part, to a decline in consumption and demand.  We boomers are retiring and, when you retire, you consume less (while producing nothing).  The economies of Europe, Japan, and even China are also facing the similar effect of aging populations now.

brushhog's picture

I've never completely understood the boomer demographic as a drag on the economy. You all had children, the growth rate was postive for boomers. Sio, as boomers leave the workforce they are being replaced in even greater number by their children..the "millenians". Dont millenials need gas too?

SmittyinLA's picture

<•{

Stimulus American economy

War against Russia and looting operation against Venezuela

silverer's picture

Yes. They want to get those toilet paper factories back in operation at a profit.

SirBarksAlot's picture

Steve St. Angelo on Crush the Street says the gap in profits has been made up with more debt.

This will lead to a downward spiral in prices:

https://youtu.be/ZPqgQ_vk0fQ

 

rickv404's picture

It wasn't enough to stimulate the economy. But higher gas prices will do nothing but diminish the economy fruther. It was a doublding of oil and gas prices, as a consequence of inflation, that led to high unemployment and the financial crisis.

yellowsub's picture

That's another collossal failure to add to Obama's legacy, his alternative energy plan...

silverer's picture

Now, to REALLY fix things, we need oil to go back up to $110.00 a barrel. Because the TV will tell you expensive oil is good. And the masses will nod their heads like bobbing puppets.

venturen's picture

better title...How Obama and the Democrats DESTROYED ECONOMICS

 

We have had recessions, depressions and recovered. What the last 7 years have done...have tried to destroy the laws of economics.....ain't going to work...and the DEBT & ECONOMIC REALIALITY ARE GOING TO DO IS DESTROY THE COUNTRY/WORLD FOR DECADES!

Youri Carma's picture

Big Oil Was Never That Big a Money-Maker, Goldman Sachs Says – Return on capital declined during the era of high oil prices
19 September 2016, by Tracy Alloway (Bloomberg)
http://www.bloomberg.com/news/articles/2016-09-19/big-oil-was-never-that-big-a-money-maker-goldman-sachs-says

harleyjohn45's picture

Wait until oil goes back up, then you will see people really hurting.