For the US economy, a falling oil price has drawbacks, too

Dec. 19, 2014
Cheer in the US about an economic lift from falling oil prices needs qualification.

Cheer in the US about an economic lift from falling oil prices needs qualification.

Without question, a drop in crude oil prices since mid-2014 of nearly 50%—at this writing in the middle of December—allows consumers of gasoline and other oil products more money to spend elsewhere.

The US Energy Information Administration estimates the average household will spend $550 less for vehicle fuel in 2015 than it did in 2014.

EIA’s projected 2015 spending on gasoline and motor oil of $1,962/household, based necessarily on uncertain price assumptions, would be the lowest since 2004 and the first yearly average below $2,000 since 2009.

But the affiliated economic goodness comes at the expense of activities greatly responsible for US economic recovery from the 2008-09 recession.

In response to the price plunge, oil and gas companies at the end of 2014 were reporting plans to cut capital and exploratory budgets. Among early announcements, ConocoPhillips and Marathon Oil said they’d invest about 20% less in 2015 than they did in 2014.

Among smaller producers specializing in unconventional resource plays, pullbacks will be more dramatic. Many—although not all—of them were investing aggressively with negative cash flow and heavy debt.

Some measure of retrenchment thus is in store for the drilling boom. A correction was inevitable, even necessary. Oil prices couldn’t soar above $100/bbl forever.

But this latest boom’s contribution to the national economy has been extraordinary.

A study last February by the conservative Manhattan Institute said that, without the oil and gas boom—which it estimated added $300-400 billion/year to gross domestic product—the US economy would have remained in recession.

On balance, macroeconomic gains related to falling energy prices probably will offset losses resulting from contraction of oil and gas drilling responding to a price decline.

As the adjustment proceeds, though, the powerful influence of resource development on US economic affairs must not go unnoticed. Oil and gas drilling and production are good for American prosperity—lately, especially so.

(From the subscription area of, posted Dec. 19, 2014; author’s e-mail: [email protected])