Oil, gas price dive could mean economic boost?

DeRon Talley

Oil prices dropped this week below $50 a barrel for the first time since April 2009.

High oil prices in recent years drove the energy boom by making costly drilling techniques like hydraulic fracturing economically feasible, particularly in Texas and North Dakota. Now, rising global supplies of oil coupled with falling demand have brought prices down.

Don’t be fooled by the naysayers, lower gas prices are still good for the U.S. Prices of regular gasoline have fallen from $3.27 a gallon one year ago—and from a high of $3.68 in June—to around $2.77 on Monday.

Around Ascension Parish, we’re seeing prices nosedive to under the $2 mark. All of that should provide a key boost at a time when growth abroad is faltering, even if lower prices curb investment in an expanding energy sector.

According to the Wall Street Journal, consumers spent $370 billion on gasoline last year. With prices expected to fall around 20 percent from their average during the first half of the year, the drop in gas prices over the past six months amounts to a $75 billion tax cut for consumers, according to an analysis by Kris Dawsey, an economist at Goldman Sachs.

Lower gas prices also benefit most businesses because it reduces shipping and production costs. Goldman estimates that the total boost from lower gas prices should boost growth domestic product by 0.4 percentage points over the coming year.

A drop in gas prices could be a particularly progressive tax cut because lower-income households are particularly sensitive to increases in energy prices. Households earning less than $50,000 annually spent around 21 percent of their after-tax income on energy in 2012, up from 12 percent in 2001, according to analysts at Bank of America Merrill Lynch. Households earning more than $50,000 spent nine percent of their after-tax income on energy, up from five percent in 2001.

For energy producers the surge in domestic oil production means that the drop in gas prices could cramp one of the hottest sectors of the U.S. economy over the past four years. One estimate shows around 80 percent of new shale-oil wells will remain profitable with oil prices between $50 and $69 a barrel.

Taken together, that means lower oil prices should boost growth by around 0.2 to 0.3 percentage points. A separate model created by the Federal Reserve Board shows a 25 percent drop in oil prices would boost GDP by a smaller amount, between 0.1 and 0.2 percentage points during the first half of next year, according to Goldman.

The benefits to consumers also accrue over time as drivers fill up their tanks. So far, lower gas prices have saved the average household around $80, according to ClearView Energy Partners. If prices were to stay at their current levels for a year, the savings could raise to around $340 a household.

So enjoy the gas coupon we’re getting right now, and use it to boost the local economy by shopping local. After all, the oil industry will always be a billion dollar industry.