Cheap Oil is no longer a good thing for the U.S Economy

Previously, the decline in oil prices was definitely beneficial to the American economy, but now the situation is more complicated and this principle no longer works. Thanks to the shale boom, the United States this year has become the world’s largest oil producer, and much of the investment and jobs in the country have been linked to the oil industry. Therefore, lower oil prices create risks in an important sector of the economy. In addition, over the past decades, American consumers have become less sensitive to changes in fuel prices.

Today, oil in the United States is produced mainly in numerous shale deposits. Since such wells are rapidly depleted, the process requires constant drilling, and small companies involved in this are highly dependent on borrowed funds. This makes oil production and investment in the industry sensitive to lower prices, which can lead to the bankruptcy of oil companies or force them to reduce capital investments.

Large producers of shale oil, including EOG Resources and Whiting Petroleum, call the current prices for WTI oil, about $ 50 per barrel, the mark below which they will begin to reduce drilling. “If prices drop to $ 40 and stay at that level, investment and production growth in the United States will decrease,” said Chris Wright, general director of Liberty Oilfield Services, which conducts hydraulic fracturing for oil producers.

The previous Crude price collapse confirmed the new trends. The decline began in mid-2014, when WTI was worth about $ 105 per barrel, and a few months later the activity of the drillers decreased. By the end of 2016, private investment in oil and gas exploration and drilling decreased by two thirds, and the number of jobs in the industry decreased by almost 190,000.

Oil-producing regions such as Texas and North Dakota were particularly hard hit by prices, but the consequences in the form of slower growth in investment and the economy were also noticeable at the national level. “The decline in oil prices has a negative impact on investments in the United States as a whole,” said Nida Chakir Melek, an economist at the Federal Reserve Bank of Kansas City.

The US Bureau of Economic Analysis estimates the investment of oil and gas companies at about $ 137.48 billion per year. This is more than two times less than how much Americans spend on fuel ($ 324.51 billion), but does not reflect the construction of residential buildings, hospitals and shopping centers in oil-producing regions. However, it is not by chance that after the fall in oil prices in 2014–2016. a slowdown in the economy followed, says Schäferdson. And, according to his estimate, due to the collapse in prices this fall, US GDP growth rates will lose about 0.3 percentage points next year.