Cost of Oil May Lead to Less Economic Growth
With the price of a barrel of oil down to less than $30 (down from $100) you may be breathing a sigh of relief every time you approach a gas pump and see prices around two dollars or less per gallon. This means that filling your tank puts less strain on your wallet and that money can go toward other bills or even into your savings.
Less money into our gas tanks means more money back into the economy, and in states like Michigan that don’t produce a lot of oil, when oil prices drop, it’s typically good news all around.
But these perks are often indicators of something sinister lurking beneath the surface. If we were to look past Michigan, past the U.S. even, we would see some alarming sights. We would see oil tankers sitting idly off the coast of Iran, filled with up to 50 million barrels of crude oil. We would see 61 percent less active oil tankers than we saw last year and we would see once booming oil towns now sitting silent and still. So, what do these contrasting visions mean?
To put it simply, it means there is a lot of oil out there. In less than a decade, the fear radiating from the industry has changed from a shortage of oil to an excess.
“Because of hydraulic fracturing and advances in technology, the U.S. has doubled the amount of oil we bring to the global market,” says Charles Ballard, an economics professor at Michigan State University.
While this excess could have been offset if other countries had cut back production, they didn’t. Ballard hypothesized that there are many reasons for this and the theories range from the economic to geopolitical, but are mostly speculation at this point.
Whatever the reasons, the result is an excess of oil which could be worse than a shortage.
A shortage leads to work. Rigs fire to life, crews are dispatched and small oil towns run at full capacity in order to help fill the shortage. And, when there is just enough of a supply to meet the demand, the market is in balance and prices are stable. But when the supply is in abundance and there is more than meets demand, we begin to see more than just low gas prices.
The Stock Market:
The first lesson we learn in economics class is the law of supply and demand – when demand drops, price drops. And, for a stock market where some of the major players are energy companies like Chevron and ConocoPhillips, this is bad news. Their profits are down and as a result their stocks have plummeted.
“A shaky stock market brings on fears of a recession,” said Ballard. “Even though all other signs indicate a growing economy, analysts are caught by conflicting signals.”
And it’s not just analysts that are worried by the numbers they see. The Dow has dropped 1,800 points and for the general public, this means their futures are on shaky ground when it comes to their investments and their 401(k) investments.
The Job Market:
Michigan may be seeing the perks that come with a lower price at the pump, but as prices continue to drop, the unemployment rates across the country may continue to rise.
Ryan Freeman, a construction manager for a Canadian/American crude oil transporter, is already seeing signs of this. His line of work, transporting oil the large companies have already purchased, takes him to a fair share of “oil towns” and it’s these towns that are suffering.
“Towns that were once booming are now slowing down,” he said. And it’s affecting his business too: “When prices are down, no one can pay to transport, that means a lower profit margin, and that’s typically when cuts start. It likely means not one, but several rounds of layoffs.”
This seems to be the pattern around the country, with oil producing states seeing the biggest drops. Government statistics show that the energy industry slashed 130,000 jobs in 2015. Losses in oil-related jobs will most likely up that number. “When things like this happen, people are seen as numbers,” said Freeman. “The companies need to save money and things like experience and longevity just don’t matter anymore.”
The Little Guy:
And it’s not just large companies and businesses that are affected. Freeman has seen the trickle effect start to reach the mom and pop businesses of these rural oil towns.
“These towns might only have a gas station, a diner and a hotel, and they depend on large oil projects to fill those businesses. When these projects don’t come, they are in trouble.”
And right now, they’re not coming. While Freeman typically knows by January what he will be working on for the rest of the year, like these small businesses, he’s still waiting.
“The companies that fund these jobs just don’t know what kind of money they are going to have,” he said.
While there are conflicting opinions about how long the drop in price will continue, at least one solution has gone into effect as the Organization of Petroleum Exporting Countries’ oil ministers have agreed to cut back on production. The agreement should lead to more stable oil prices. And while stable prices may bring on a rise at the pump, the overall effect across the U.S. will leave us all breathing a sigh of relief.
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