Low gas prices prompt Americans to drive more

With falling oil prices rippling through the global economy — resulting in layoffs, reduced investment and diminished profits for some of the world’s biggest energy companies — Americans have been taking advantage of the resulting low prices at the gasoline pump like never before.

Through the first five months of the year, Americans have driven more miles than they ever have during that period, an indication that at least some of the savings they are seeing from lower fuel prices are being used to buy even more fuel.

“This year will shake out to be a favorable year as far as gas prices are concerned,” said Jim Ritterbusch, president of Ritterbusch & Associates, an oil trading and advisory firm in northern Illinois. “The consumer appears to be responding to that by driving more instead of spending that extra income on other items. We’ve seen the driving miles pick up, but consumer spending really hasn’t picked up that much.”

Global petroleum markets have never been known for their sanity, but events of recent weeks have been especially dizzying. Even with oil prices down more than 50% from a year ago, crude has continued to fall. Oil prices declined sharply again Friday. For the month of July, the price of oil dropped 21%.

The low prices have resulted from a combination of factors including improved extraction technologies and reduced demand in Europe, where Greek debt has slowed the economy, and in China, where financial markets have tumbled.

Low oil and gas prices generally are good for the overall economy because they reduce costs for consumers and business.

But for major oil companies, the falling prices are leading to big cutbacks.

Exxon Mobil cut spending by $1.54 billion in the second quarter after its profit fell by half, reaching its lowest level since the recession of 2009. Chevron posted its lowest profit in more than 12 years after the company had to write down the value of oil and gas fields by almost $2 billion, and it is laying off 1,500 workers. Royal Dutch Shell is cutting 6,500 jobs and reducing capital spending by $7 billion.

Until about six months ago, booming U.S. oil and gas production was helping portions of the

country’s economy — including some Wisconsin manufacturers and producers of sand used in the oil and gas extraction method known as hydraulic fracturing, or fracking. That has changed abruptly. “Industrial activity in many sectors of the economy is suffering, particularly those that build equipment for and (provide services to) commodity producers,” said Ethan Bellamy, managing director and chief oil industry analyst for Milwaukee-based Robert W. Baird, in an email.

“Cheap gasoline is costing someone their job somewhere,” Bellamy said. “Close to home in Wisconsin, we expect a material downshift in activity and employment in frack sand mining.”

Wisconsin is the nation’s largest producer of fracking sand.

David Kelly, chief global strategist at J.P. Morgan Asset Management, said last week that a $29 billion decline in oil exploration and mining activity in the U.S. cut economic growth by 0.7% in the second quarter, a sizable chunk for an economy that grew 2.3% in the quarter.

Meanwhile, layoffs at three of the big oil and gas service companies are nearing 60,000 after two of them, Halliburton and Baker Hughes, revealed further layoffs in quarterly filings last month.

Investors are also feeling the pain. Lower oil company profits have an outsized effect on stock markets because the companies are so enormous. Analysts at RBC Capital Markets say that when oil prices drop by 10%, earnings for the overall S&P 500 fall by 1%.

After nearly four years near $100 a barrel, the price of oil began slumping a year ago, falling to $43 by March. It surged briefly to $61 in June, but then fell again. Oil traded just above $47 a barrel on Friday.

That has translated to sharply lower fuel prices. The U.S. average retail price of gasoline through the first half of the year was 30% lower than during the same period last year. On Friday, the national average was $2.67 a gallon, 85 cents lower than last year at this time, according to AAA. Wisconsin’s average price was $2.64 Friday.

Prices for diesel and heating oil have averaged 27% lower than last year, and airlines have posted their highest profits in years thanks to lower fuel prices.

The low prices, along with the pain for the oil industry and pleasure for consumers, appear likely to continue for a while.

“The massive growth in U.S. oil and gas production has altered the global petroleum market,” Bellamy said. The Associated Press and Bloomberg News contributed to this report