The Odd Consequences of the Oil Price Crash

11-Jan-2016

In the middle of 2014, oil traded for more than $100 a barrel. Today, it is below $35. Traditionally, there would be numerous positives from low oil prices, but many of these have yet to materialize or may no longer be relevant at all. The U.S. shale boom, one of the great American growth stories, appears to be rolling over, and the jobs are drying up. China, as it is with the vast majority of commodities, is both a dominant force behind growth, and a significant participant in its decline. And for the traditional energy power brokers in the Middle East, the harsh reality of low oil has already begun to destabilize the region.

The U.S. economy was expected to benefit from lower oil prices, but in terms of consumption growth, the effects have been minimal. Instead, it appears consumers have used the savings to pay down debt. Undoubtedly, this is positive and necessary, but it fails to show up in present growth rates. Deleveraging bodes well for future growth, but does little to thrust the present economy forward. This, of course, is a bit of a headache for the Fed—low interest rates are supposed to pull spending forward. Debt was, and remains, cheap. But instead of bingeing on cheap debt—and magnifying the effects with cheap oil—the consumer has turned the other way. This is one of the less publicized and most confounding oddities in the aftermath of the financial crisis.

Households have yet to believe that oil will remain low. Because of the rhetoric predicting a recovery in the price from the current $35 level—and the recent volatility of the price, it may take longer for households to alter their consumption habits, if they ever do.

In fact, the U.S. economy does not appear to have the same relationship it once had with high oil prices. (by Samuel Rines, The National Interest)


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