Are Low Oil Prices Good for the Economy?

Some
say yes because low prices give consumers more
money and cut manufacturing costs. Others say
the damage to the oil sector cancels out the
benefits.
Anonymous . Wall Street Journal (Online) ; New York, N.Y. [New York, N.Y]14 Nov 2016: n/a.

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ABSTRACT
 
Some say that the effect is positive, lowering prices at the gas pump for consumers, as well as the cost of doing
business for many companies that rely on oil. Stephen Moore, an economist at Freedom Works, economic adviser
to President-elect Donald Trump, and co-author of "Fueling Freedom: Exposing the Mad War on Energy," makes the
case for the overall benefits of low oil prices.

FULL TEXT
 
Oil prices have been on a wild ride lately.

From late 2010 to late 2014, U.S. crude traded between roughly $80 and $110 a barrel. Then came a plunge. Earlier
this year, they were down to around $26--but then soared to $50 in early June, signaling that a longstanding oil glut
might be waning.

The recovery that many experts predicted didn't materialize, however. Prices recently eased below $50 once again.

What comes next? Oil prices are now expected to hover between $40 and $50 for longer than many had forecast;
some don't see a major increase in prices coming for two years. One of the factors holding down the price: The
boom in shale oil, which now accounts for half of the supply in the U.S. market.

But is a lower price good or bad for the economy? Some say that the effect is positive, lowering prices at the gas
pump for consumers, as well as the cost of doing business for many companies that rely on oil.

Others argue that any such benefits are minor, and are outweighed by the negative effects on the U.S. oil industry--
which has become a big part of the economy.

Stephen Moore, an economist at Freedom Works, economic adviser to President-elect Donald Trump, and co-
author of "Fueling Freedom: Exposing the Mad War on Energy," makes the case for the overall benefits of low oil
prices. Arguing against him is Christiane Baumeister, an assistant professor in the department of economics at the
University of Notre Dame.

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YES: It Gives Consumers More Money and Cuts Manufacturing Costs

By Stephen Moore

The greatest stimulus to the U.S. economy in the past two years has been the steep decline in oil prices. Two years
ago, the price of oil was $105 a barrel. Today it is closer to $45--about a 60% decline.

Think about the boon to American consumers. In 2014, gasoline cost more than $4 a gallon at the pump in many
areas of the country. Now the price is closer to $2.50 a gallon.

Here's a rule of thumb. Every one-penny reduction in gas prices puts more than $1 billion a year into the hands of
consumers for them to save or to spend on other things. So, that $1.50 reduction in the price at the pump has been
a $150 billion a year stimulus plan.

What other policy could possibly carry that kind of economic wallop? And when's the last time you saw someone
at the gas pump complaining about low gas prices?

Some will say that putting extra cash in consumers' pockets doesn't really help the economy because they don't
necessarily spend what they save at the pump. But that's great: Savings and investment are the seed corn of a
prosperous economy--not consumption.

It isn't just motorists who benefit mightily from low energy prices. Energy is the fundamental input in everything we
produce in America. The chair you are sitting in. The breakfast you ate this morning. The car you drive. The
computer you power up.

That means American manufacturers have lower production costs when prices of oil and gas (and coal, for that
matter) fall.

And because energy prices have fallen faster in the U.S. than in other countries--natural gas is half as expensive in
the U.S. as in Europe and Asia--low energy prices are a competitive advantage to almost all America companies.

The blessings of low oil prices are doubly felt in the U.S. because we still import hundreds of billions of dollars of
oil a year. The big losers from low energy prices are Iran, Saudi Arabia, Russia, ISIS and OPEC. Couldn't happen to a
nicer group of people.

Now, it is true that many of my friends in the oil and natural-gas industry are hurting, and the stocks of these
companies have been hammered. The good news is that technology is improving all the time.

The current low oil prices were brought to you by fracking and other new drilling technologies that have made the
shale oil and gas revolution a reality. And because those production technologies keep getting better and better, oil
and gas companies are learning to make money even with oil at $40 to $50 a barrel. Necessity really is the mother
of invention.

What about the argument that oil production is a big part of the American economy now, so the shocks to the oil
industry cancel out the benefits felt elsewhere? That argument doesn't hold up. As a nation, we are sufficiently
diversified to withstand oil slumps. Even Texas has seen growth as oil prices have fallen.

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Some naysayers also think that the big reason the price of oil is down is that the economy is down--so a low price
isn't a good thing. Yes, there are good and bad reasons that oil prices fall. The good reason is the supply rises. The
bad is a weak economy. We don't want the world to go into a depression to keep oil prices low. But more supply is
always a good thing because it reduces the fundamental economic challenge of scarcity.

I also keep hearing that low energy prices are bad news for stocks. Maybe in the very short run. But remember: The
two biggest booms in the stock market in U.S. history were in the 1980s and 1990s. In both of those decades, oil
prices fell and fell and fell. The worst decade since the Great Depression for stocks was the 1970s, and that was
when the oil price soared from $3 to $30 a barrel.

We can also put aside the inane idea that America is running out of oil. It was only a few years ago that Barack
Obama said in a speech at Georgetown University: "The United States of America cannot afford to bet our long-
term prosperity, our long-term security, on a resource [oil] that will eventually run out." Paul Krugman wrote in 2010
that "commodity markets...are telling us that we're living in a finite world." And they both have Nobel Prizes! In
reality, America isn't running out of cheap oil, we are running into it.

If we continue to promote cheap, abundant and reliable made-in-America energy, the U.S. within six years can
become not just energy independent, but the energy dominant country in the world. That's spectacularly good
news for not just our national economy, but our national security as well.

Mr. Moore is an economist at Freedom Works, economic adviser to President-elect Donald Trump, and co-author of
"Fueling Freedom: Exposing the Mad War on Energy." He can be reached at reports@wsj.com .

NO: The Damage to the Oil Sector Cancels Out the Positives

By Christiane Baumeister

Ever since the oil crises of the 1970s, the conventional wisdom holds that oil-price increases are bad for the
economy. This suggests that lower oil prices should be good news for the economy.

Not necessarily.

There is no question that falling oil prices have brought down the cost of production for industries that depend
heavily on oil, or that they've increased the disposable income available to households. What matters in the end,
however, is the overall effect of lower oil prices on the U.S. economy. And that effect has been negligible.

A drop in the retail price of gasoline acts like a tax cut from the point of view of gasoline consumers. Having extra
money in their pockets means that households are able to spend that money on other goods and services, which
stimulates the economy, directly via increased consumption and to some extent indirectly through investment
unrelated to oil.

The trouble here is figuring out just how much purchasing power--and actual purchasing--comes from lower prices.

For one thing, it cannot be taken for granted that refineries will always pass on their cost savings to consumers at
the pump, so lower oil prices don't always translate into lower prices for drivers. On the consumer side, instead of
spending the windfall income from lower gasoline prices, households might use it to pay off debts or increase
savings.

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As for cutting the cost of doing business for manufacturers that use oil, it's true that any modern economy "runs
on energy." But energy costs tend to be small relative to other costs in production, with the exception of a few
industries that use crude oil as feedstock. So, businesses aren't really saving that much under low oil prices.

More broadly, whatever stimulus the economy has gotten from lower prices has been canceled out by the damage
done to the oil sector. Oil has become a much larger portion of the American economy, so the economy is much
more vulnerable to oil-price declines. While the oil industry thrives when prices are high and positively contributes
to growth of the domestic economy, it pulls the economy down when oil prices slump.

The result: The recent drop in oil prices has meant a net zero effect on real growth in the gross domestic product.

Also remember that the overall economic effects of lower prices depend on the environment in which a major
change in prices occurs. Part of the recent oil-price drop is due to increased supply. However, there has also been
a decrease in demand because of slowing growth in the global economy. Even if lower oil prices had a modestly
positive effect instead of a neutral one, it would make almost no difference in the face of such a powerful global
trend.

Some argue that lower oil prices give American companies a competitive advantage internationally. But consider
that a weakened global economy is driving down demand for U.S. exports. What's more, the appreciation of the
U.S. dollar against almost all of its trading partners makes exports more expensive--and thus less attractive.

There's also the argument that low energy prices are good for the U.S. economy because they hurt the economies
of countries with which we are not on good terms at the moment. Good along which dimension? Because low oil
prices undermine the fiscal stability in countries that depend on foreign-exchange earnings from oil exports?
Because these budget troubles might threaten political stability? Because they might spur governments to
increase oil production to keep revenue from falling further--putting additional downward pressure on the oil price
and hence hurting the U.S. economy even more? Because they reduce their imports from the U.S.?

The supposed positive effect of low oil prices on the stock market is also dubious. Historically, the correlation
between oil prices and stock prices has been both negative and positive. The market is responding not to oil-price
fluctuations themselves, but to what's driving those fluctuations.

Simply put, when lower oil prices reflect mostly a weaker global economy, stock prices will tend to respond by
going down. When lower oil prices are mainly due to good news about plentiful supplies, the market will tend to
respond by going up.

The bottom line: Low oil prices have only modest effects on real GDP growth, and which direction it goes depends
on how much of the stimulating effect from consumption is offset by the loss in investment in the oil sector.

Dr. Baumeister is an assistant professor in the department of economics at the University of Notre Dame. Email
her at reports@wsj.com .

Journal Report

* Insights from The Experts

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* Read more at WSJ.com/EnergyReport

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Previously in Energy

* The Coming U.S. Price on Carbon

* Not So Fast: A Carbon Price Isn't Near

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* Ban Ki-Moon on Enforcing the Paris Accord

* Does the U.S. Need a Large Petroleum Reserve?

* Oil, Earthquakes and Liability

DETAILS

Subject: Cost control; Natural gas utilities; Oil shale; Price increases

People: Trump, Donald J

Company / organization: Name: University of Notre Dame; NAICS: 611310

Publication title: Wall Street Journal (Online); New York, N.Y.

Pages: n/a

Publication year: 2016

Publication date: Nov 14, 2016

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 Section: Business

Publisher: Dow Jones &Company Inc

Place of publication: New York, N.Y.

Country of publication: United States, New York, N.Y.

Publication subject: Business And Economics

Source type: Newspapers

Language of publication: English

Document type: News

ProQuest document ID: 1838641026

Document URL: http://ezproxy.sl.nsw.gov.au/login?url=https://search.proquest.com/docview/18386

41026?accountid=13902

Copyright: (c) 2016 Dow Jones &Company, Inc. Reproduced with permission of copyright owner.
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Last updated: 2017-11-23

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