We were amused on January 23 when our Time magazine arrived, dated February 2. We wish we could be so clairvoyant. In any case, we know that a trend is revealed when cheap gasoline makes the cover of Time.
Brent crude oil, the global benchmark, has fallen from $110 per barrel to $50 per barrel in the course of one year. Thanks to advances in technology, including horizontal drilling and hydraulic fracturing, U.S. oil production has risen to nine million barrels per day from five million in 2006, pushing reserves to their highest levels in 80 years. If gas prices fall by two-thirds as oil has done, the average American family could save $2,000 in 2015, equivalent to a 4.5% pay raise.
The rapid change in oil prices has been so dramatic that it has caused anxiety as well as joy. Joy comes because consumers have more money to spend; anxiety stems from the fact that energy is a major player in the U.S. and global capital markets.
Previously falling oil prices were interpreted as weakening demand and a weakening global economy, but the January 17 issue of The Economist asserts that the fall in oil is caused by plentiful supply and not by weak demand. The problem is that although the extra money in the hands of consumers will create new jobs, the cuts in energy production threaten existing jobs. This is why low-priced oil is not all joy.
Creating middle-class-level jobs has generally been a problem for the U.S. economy, although the energy sector has been very effective at creating higher-paying, middle-class jobs. As the global market price of oil falls, American producers are cutting back as they can no longer make a profit. This dynamic creates winners and losers. The American consumer is definitely a winner along with the airlines, China, and Japan. Venezuela, Russia, Iran, Nigeria, and Alaska are big losers. Oil taxes account for 90% of Alaska’s state budget. Alaska collects no sales tax or income tax. Alaska is the poster child for the non-diversified economy. In the long run, it appears that the plentiful supply of oil will persist. American technology will continue to boost production. Saudi Arabia is choosing not to cut production, as they have in the past, to reduce supply and raise prices. They may be trying to destroy or inhibit producers they consider to be enemies (Iran and Iraq). In the U.S., conservation efforts are paying off as Americans are driving less and fuel efficiency continues to increase. As this new normal for energy prices develops, low oil prices will produce more economic joy than anxiety.