Relax, falling oil prices are mostly a good thing

The negative economic impact of falling oil prices is less significant than it was four years ago while the positive aspects are just as strong.

  • By Justin Lahart,
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Is the big drop in oil prices going to be good or bad for the U.S. economy? Probably good, but getting to that answer isn’t as simple as it used to be.

It used to be straightforward: Falling oil prices were good. That is because the U.S. consumed far more petroleum than it produced. When prices fell, the U.S. spent less on imported energy, leaving consumers with more money to spend on other, mostly homegrown goods and services.

The shale revolution, which dramatically increased the amount of oil the U.S. produced, changed that. The drop that brought crude oil prices from more than $100 a barrel in mid-2014 to below $30 in early 2016 cast a pall over the economy. This came as a surprise to many economists and investors, since the country still imported more oil and other petroleum products than it exported (something that continues to be true).

But there was considerable investment associated with the shale boom. When oil prices fell, that investment dried up, sapping overall U.S. capital spending. And while the U.S. overall continued to generate solid job growth, places like Texas’s shale-producing region and North Dakota experienced significant job losses. That weighed on consumer spending. People who have lost—or are worried about losing—their jobs curtail their spending by a lot more than people saving a bit of money at the gas pump increase theirs.

Oil prices are falling again and, while the slide so far isn’t as severe as in the 2014 to 2016 rout, its intensity has been remarkable. In New York trading Friday, oil settled at $50.42 a barrel, down from an early October high of $76.41.

But even if prices keep dropping, it probably won’t be as disruptive as before.

That is because the shale production is far less speculative, and far more efficient, than it was a few years ago. Even though the U.S. is pumping much more crude now than when production peaked in 2015, the oil industry accounts for a smaller share of overall capital spending. It also employs fewer people. As of last month, there were 153,200 oil and gas extraction jobs in the country, according to the Labor Department, which compares with 200,700 jobs four years earlier.

Will the drop in oil prices cool capital spending and lead some people to tighten their belts? Sure—but not by as much as it did during the last big price drop, and probably not by enough to offset the positives of low gasoline prices.

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