What are the possible causes and consequences of higher oil prices on the overall economy? November What a daunting question! With oil prices increasing rapidly in the recent past, it is hard not to wonder what has caused it and just what effect it might have on the rest of the economy.
How Oil Prices Impact the U. Oil exploration and production is again an important industry in the United States. In this article, we will look at how oil prices impact the U. A Reversal of Fortune In the s and early s, the United States was struggling under declining domestic oil production and the resulting need to import more oil.
Wells in Texas and other regions were still producing, but falling far short of meeting growing energy demands. In the latter half of the s, however, new technology allowed companies to economically draw oil and gas from shale deposits that were once considered depleted because the cost of extraction would be impractical.
Higher prices per barrel of oil also helped to justify the cost of a hydraulically fractured well. The United States is once again one of the top producers of oil and gas. Greater domestic oil production is a net positive for the United States.
Oil and the Cost of Doing Business The price of oil influences the costs of other production and manufacturing across the United States. For example, there is the direct correlation between the cost of gasoline or airplane fuel to the price of transporting goods and people.
A drop in fuel prices means lower transport costs and cheaper airline tickets. As many industrial chemicals are refined from oil, lower oil prices benefit the manufacturing sector. Before the resurgence in U. This reduction of costs could be passed on to the consumer.
Greater discretionary income for consumer spending can further stimulate the economy. However now that the United States has increased oil production, low oil prices can hurt U. Conversely, high oil prices add to the costs of doing business. And these costs are area also ultimately passed on to customers and businesses.
Whether it is higher cab fares, more expensive airline tickets, the cost of apples shipped from California, or new furniture shipped from China, high oil prices can result in higher prices for seemingly unrelated products and services.
The hydraulically fractured wells tend to have a shorter production life, so there is always new drilling activity to find the next deposit.
All this activity requires labor including drilling crews, loader operators, truck drivers, diesel mechanics, and so on. The people working in these areas then support surrounding businesses like hotels, restaurants, and car dealerships.
Less activity can lead to layoffs which can hurt the local businesses that catered to these workers. Therefore, the negative impact will be felt keenly in the shale regions even as some of the positive impacts of lower oil prices start to show in other regions of the United States.
This is regionally painful for the country and effects show in state-level unemployment statistics.
However, these losses may not have a noticeable impact on national unemployment numbers. The other groups that tend to suffer when U. There are a lot of different companies drilling and servicing wells on the shale deposits, and many of these companies finance their operations by raising capital and taking on debt.
This means that investors and banks both have money to lose if the price of oil drops to where new wells are no longer profitable and the companies dependent on drilling and service then go out of business. Of course, investors and bankers are well-versed in risks and rewards, but the losses still destroy capital when they happen.
Between the job losses and the capital lossesa dip in oil prices can trim the growth of the U. The Benefits of Diversity Even with the loss of growth, the U.
How Globalization Affects Developed Countries. Although oil and gas production has been one driver of recent growth, it is far from the most important sector of the economy. It is, of course, connected to other sectors and losing growth in one can weaken others, but sectors like manufacturing gain more than they lose.
In short, the U. This means it takes more than just low oil to shake the U. Bottom Line Oil prices do have an impact on the U. High oil prices can drive job creation and investment as it becomes economically viable for oil companies to exploit higher-cost shale oil deposits.Despite these effects on supply and demand, the correlation between oil price increases and economic downturns in the U.S.
is not perfect. Not every sizeable oil price increase has been followed by .
Feb 21, · Third, the collapse in oil prices has led to a major short-term drop in investment in the oil industry, with global investment in production and exploration falling from $ billion in to $ billion in , with spill-over to energy commodities.
Today’s drop in crude-oil prices, which began in the summer of , may be as disruptive as the quadrupling of oil prices that created the oil shock of An in-depth longitudinal analysis was made of the economic and employment impact of the oil industry in West Texas.
Specifically, employment by county relative to oil price fluctuations was We discussed the oil price recovery and the prognosis for its future price point and the impact and. In recent months, we have seen a dramatic drop in oil prices.
For many consumers and business, this fall in the price of oil will be welcome reduction in the cost of living and a reduction in the cost of business. However, is such a steep fall in oil prices good for the economy?
In normal economic. This means it takes more than just low oil to shake the U.S. economy, but it is not uncommon for oil prices, high or low, to increase the impact of economic shocks.
Bottom Line. Oil prices do have an impact on the U.S.
economy, but it goes two ways because of the diversity of industries.