Cheap Oil Hurts More Than Rates Hike

Cheap Oil Hurts More Than Rates Hike

Let’s laugh the crap out of economists for feeding us the misinformation for years that the low price of oil would be great for the US economy!

Revisit the most recent headlines – really taking the mirror opposite views to fit the most recent economic realities (we will use only the most reputable sources – the Economist and Bloomberg):

Cheap oil is just an indication of global oversupply and while the abundance is good, and on the way of creating it, many important parts of economy were overstimulated. Now they are giving some of that back

  1. Spending on gasoline as a share of wallet by US consumers was trending down for decades and now is at a multi-year low (with predictable cyclical up and downs).   See the Figure 1.   Many, many reasons for that: people spend more on services, drive fewer miles using more efficient vehicles, etc.
  2. What do consumers spend their money on if they spend $15 less at a pump? An extra pair of Twinkies, or a frivolous trip to the Movies to check out the release of Spectre? That is still a consumption! What difference does it really make? Spending dough on other services is no really different than spending money on more expensive gasoline, natural gas, etc. But the multiplier effect is indeed very different…
  3. During 2005-2011, expensive oil was enormously stimulative to the US economy! It accelerated shale gas and shale oil development, development of extensive pipeline, upgrades in refineries, boosted domestic production of chemicals and related exports. See Figures 1 how much rig drilling activity happened across. But the list is very long. The US is steadily shifting to becoming a net energy producer, (especially if you include coal) that we used to ship to Europe. Oil Service companies can do truly amazing things: they can drill for miles under water twisting direction of pipes several times and hitting the right spot the size of a small car many miles away. That is a true high-technology. Yankee ingenuity at its finest!
  4. Further down the value chain the whole boom at smarter energy readers at households and businesses, optimization of routes and speeds for sea cargo boats and aircraft, electric cars (yes, I do admire Elon Musk and inventors of Prius).
  5. Those expenditures had a really long multiplier effect boosting developments and consumption globally. Don’t forget that even when US was importing oil from overseas from Canada, Middle East, etc. some of that money came back directly or indirectly. Remember herds of Canadian tourists (and shoppers) across the North East, and Russian oligarchs buying prime real estate in New York and Miami? How about Brazilian tourists and shoppers in the US and Europe? Brazil does indeed produce and ships tons of crude oil globally. How about an employment boom in Texas? Texas never felt the 2008 crisis.   Houston, being the oil capital of the World was creating more jobs than any other area in the US. See Figures 3-4. How about the stock market and boom in credit financing for Exploration & Production oil companies?

What do we have now? A very painful, yet predictable reverse in some of those trends: zombie oil fields, halted rigs, abandoned capital expenditure plans, oil workers sent home until further notice. Houston, we have a problem…

Cheap Oil Hurts More Than Rates Hike

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