Helping America Navigate a New Energy Reality

This Time, Cheaper Oil Does Little for the U.S. Economy

By on 21 Jan 2016 in analysis, notable posts

(NY Times) WASHINGTON — It has been a truism of the American economy for decades: When oil prices rise, the economy suffers; when they fall, growth improves.

But the decline of oil prices over the last two years has failed to deliver the usual economic benefits.

As oil prices have fallen to levels not seen since 2003 — sagging below $27 a barrel on Wednesday before rebounding to about $30 on Thursday — many experts now say they do not expect lower prices to bolster the domestic economy significantly in 2016.

“We got this wrong,” John C. Williams, president of the Federal Reserve Bank of San Francisco, told an audience in Santa Barbara, Calif., this month.

Lower oil prices historically were a cause for celebration in the developed world, including the United States. The effect was akin to a tax cut for consumers who could fill their gas tanks for less money. And since much of that oil was imported, the windfall was generally larger than the damage to domestic oil producers.

Every dollar gained by consumers was a dollar lost by producers, but when the dollars were lost by foreign producers, the American economy should have benefited.

But this time is different. The losses from lower prices are larger and quicker than expected as energy companies cut back on investment and lay off workers, while the gains are smaller and slower to materialize, as consumers save some of their windfalls.

Economists at JPMorgan Chase, who predicted last January that lower oil prices would add about 0.7 of a percentage point to the economic growth rate in 2015, now estimate that lower prices might have shaved 0.3 of a percentage point off the growth rate.

This year, JPMorgan predicts that lower prices will help expand economic activity by just 0.1 of a percentage point, while economists at Goldman Sachs said they expected an impact “around zero.”

The decline of oil prices is causing other problems, too. It has contributed to the correction in global equity markets; the Standard & Poor’s 500-stock index is down 10 percent this year. And lower prices are weighing on inflation, jeopardizing the Federal Reserve’s plans to raise interest rates by about one percentage point this year.

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