Oil prices kicking economy in the shins, experts say
Low oil prices have not been the economic boon analysts expected, with sharp investment cutbacks by crude producers offsetting the positive impact of cheap gasoline on consumer spending.
Economists have varying views of the net effects of the oil crash in the U.S., but several research firms consider it a wash or slight negative, while others say it’s been an unmitigated drag on growth.
The gloom pervading the industry has intensified in recent weeks with each drip of bad news about major oil companies’ capital spending cuts, layoffs and financial losses spreading to the broader stock market and global economy.
Oil companies have cut 232,000 jobs in the past 14 months, according to oil producer Continental Resources, which tracks layoffs. Such losses hurt consumer spending.
The U.S. benchmark oil price has plunged about 70% since summer 2014. Since millions of consumers are typically more likely than corporations to spend their extra cash, economists reckoned oil’s skid would be an overall bonanza for the economy.
But with crude prices already dropping 18% in 2016, “The magnitude and duration of the slump in oil prices has far exceeded what we originally expected,” Capital Economics wrote in a note to clients. The size and duration of the price decline has hurt oil producers more than it has helped consumers, analysts say.
The number of oil rigs in the U.S. fell about 50% last year, resulting in a $70 billion drop in investment, says economist Paul Ashworth of Capital Economics. That, he says, trimmed U.S. economic growth by nearly half a percentage point to 2.4%.
A less tangible toll has come from tumbling energy company profits that helped drag down the market and dampened consumer and business confidence, says economist Joe LaVorgna of Deutsche Bank.
He estimates there’s a 40% chance of a recession this year, largely because of oil’s downturn.
Consumers, meanwhile, have saved an additional $120 billion since mid-2014, suggesting they’ve socked away virtually all of the $100 billion windfall they reaped at the pump last year, Ashworth says. “They haven’t spent a damn dime of it,” he says.
Ashworth says many Americans likely didn’t believe the low prices would last.
Jesse Edgerton of JPMorgan Chase partly attributes the disappointing outlays to consumers’ lingering postrecession caution.
But both he and economist Mark Zandi of Moody’s Analytics disagree that Americans banked nearly all their pump savings. Zandi notes the personal savings rate held steady last year at about 5.4% while incomes grew, indicating Americans saved more from fatter paychecks while spending much of their gas windfall. Consumer spending grew a healthy 3.1% in 2015.
Edgerton says monthly consumption patterns indicate households spent much of their gas money from March to May before pulling back.
The researchers conclude stronger consumption due to cheap oil added 0.2% to 0.6% to economic growth last year. But the decline in investment subtracted half a percentage point.