Michael Shustek on the Impact of Oil Prices on the Economy

Oil prices have generally been lower in the 2010s than they were in the late 2000s. While it might seem that lower oil prices benefit the economy, the results of these lower prices are varied. There is also concern that recent increases to the price of crude oil could lead to a slowdown in economic growth. This could be the case, but the increase in prices could actually help certain sectors of the economy.

Overall Impact On Economic Growth
There is data that indicates that higher oil prices lead to lower economic growth. In fact, economists have quantified this impact as corresponding to a 0.2-percent cut in overall GDP for every 10-percent increase in the price of oil. Simply put, when oil costs more, gas prices tend to increase. This means that consumers will have less disposable income available to spend at restaurants and retail establishments. They might also put off major purchases like houses and cars.

Some Benefits
High oil prices in the 2000s contributed to the rise of the shale oil boom as companies attempted to produce additional oil to meet demands while cutting the price through increased supply. This increase in domestic oil supply led to an economic boom in places like North Dakota and West Texas. The jobs that new wells brought tended to pay well and contribute to high levels of localized economic growth with a corresponding growth in local populations.

US Diversification
The drop in oil prices that came from the fracking boom hurt the economies of nations like Venezuela and Russia that were heavily dependent upon oil exports to maintain the overall standard of living for their citizens. A decline in oil jobs as fracking became less profitable did not have nearly the negative impact on the diversified US economy. One segment that could see negative results from a decline in oil prices is the banking industry. Companies that take out loans to drill new wells may not be able to pay back the loans if oil prices drop too far. As these smaller oil companies go out of business, the banks that loaned the money will be affected.

Lower oil prices at the pump can benefit consumers. On the other hand, higher prices lead to a search for additional sources of oil. Higher prices can also lead to lower overall employment as higher energy prices are in general a drag on economic growth. The price of oil is directly correlated to the health of the economy.