Typically, an oil price decline is like a tax cut, leaving more money in consumers’ pockets to spend elsewhere. That should spur growth. But since the shale boom, the United States is not only a leading oil consumer but also a leading producer. So lower oil prices also spell smaller revenue for some of our energy companies. And our producers have particularly high costs, so further investment in them may become unprofitable if prices fall too far.
Pointer from Tyler Cowen, who offers some possible scenarios, nearly all of them pessimistic. I’ll try to be more optimistic in general, but from a PSST perspective, the oil price decline might be a small net loss for the U.S. That is, the disruption to the economies in the oil-boom states may more than offset any improvements elsewhere.
Some optimistic possibilities:
1. The geopolitical outlook may brighten. Lower oil prices constrain the influence of Venezuela, Russia, and Iran.
2. Islamic militancy might decline rapidly. Some stories suggest that the proportion of Muslims becoming turned off by the militants is rising.
3. There may be a growing realization in the United States that medical services paid for with other people’s money are prohibitively expensive. See Megan McArdle’s post-mortem on single-payer health care in Vermont.
4. As of now, I would say that virtual reality headgear is in the pre-early-adopter phase. By the end of the year, it may be in the early-adopter phase, poised for spectacular growth over the next decade.
5. The attention paid to Piketty will taper off, and we will see a better crop of nonfiction books.
6. I also predict that President Obama will recover his popularity among Democrats. They will find that, as in 2008, the prospect of Hillary Clinton will enhance the appeal of Barack Obama.
On #6, I think you might be right. I voted for Barack in ’08 largely on civil libertarian grounds, but, disillusioned, voted expressively for Gary Johnson in ’12. Now that his term is drawing to an end, and the midterms are past, political observers have already started to say things like “he seems to be having more fun”, pointing to his actions on immigration and Cuba. (I’m skeptical of the former on procedural grounds, but in consequentialist terms it seems justified. The latter will probably have some beneficial effects, in the long run.) Despite my better judgment (it being best, when observing politics, to remain cynical), I find myself hoping that we might see him take aggressive executive action on the civil libertarian front, possibly as an “October surprise” bid to restore media attention to some of the more embarrassing excesses of the Bush administration, or possibly as a lame-duck action after the 2016 election.
As the US is a net oil importer so the decline is good, for consumers both here and abroad, even if bad for producers and in particular areas, but given a slowdown in development and the production fall off rates, prices have already likely hit bottom and will rise going forward so no one should expect them to last. They will just tend to increase with the economy instead of against it. The natural gas advantage will persist, so manufacture exports will do particularly well.
Certainly many share your view on oil prices, although note that they’ve been saying this for a couple of weeks during which prices have continued to decline steadily, well after the Saudi decision to maintain production levels.
It’s called winter.
Why in Christ’s name would lower oil prices be a problem for the US, still the world’s second largest net oil importer?
Second, since 2005, virtually all growth in the global oil supply has come from North American unconventionals. That’s not going to change. So we ease off the gas now, probably back on it in Q4.
Third, shale producers are not the high cost producers. The IOCs are.
Fourth, Obama’s approval rating is up 9% (pp’s) from its lows. Three months of low oil prices, and Obama is popular again. What do you think suggests about the consumer’s expectations?
Cheer up. The US is looking at its best year since at least 1999, and maybe since the Kennedy administration.
I can’t remember where I read it, but the marginal costs per barrel from current US shale oil rigs is about $40 per barrel (or less). However, the fixed costs of setting up new rigs requires prices to be above $60 per barrel (or more). So, they won’t close down current rigs, but at current prices setting up new wells isn’t viable.
With oil prices this low, it will hurt some of the profitability, as there were likely rigs that were set up before the oil price plummet that will not return their investment…should oil prices continue to stay low.
I think Iran, Venezuela and Russia are being hurt much more by the low oil prices than a handful of wildcat oil riggers in the North Dakota though. Dr. Kling may thing that’s a good thing, but I think a tail-spinning Russian economy may have some terrible consequences for Eastern Europe and Asia.
I’m not sure what #3 means — since the United States generally has the world’s most expensive medical procedures already, what system are we going to be moving to?
#3 seems dead on (although 2015 may be a bit optimistic) also, nice link to McArdle’s piece – I somehow missed it. Does anyone think Megan has a typo?: “And while restraining government spending is easy, it is a walk in the proverbial (government-funded) park compared to actually cutting spending.” shouldn’t it be “And while restraining government spending ISN’T easy,……”
Please explain how the United States, a net importer of oil, has a net loss with lower oil prices? (Then explain the 1980s and 1990s) We know as Professor Krugman noted there will be substantial losers in Dakotas, Oklahoma & Texas but doesn’t the other of the nation improve?
I think Arnold is referring to the fact that his PSST “theory” (not sure it is well-specified enough to make quantitative predictions that would merit that word) has “sustainable” right in the acronym. Given the recent prevailing paradigm of relatively high oil prices, American firms entered into certain patterns of business and trade which increased the size of our oil sector and (presumably) had various knock-on effects throughout domestic supply chains, capital investment schedules, geographic allocation of resources, etc. A switch to a regime of relatively low oil prices *necessarily* entails realignments in all these dimensions, towards new patterns of specialization and trade that are sustainable in the new regime. In Arnold’s view of the economy (I think — I don’t mean to put words in his mouth) such realignments arise inexorably, and do so only at the cost of short-term productivity losses. In other words, you cannot model the change in GDP for a country in response to an oil shock as a simple monotonic function of (net oil imports) * (change in oil price); rather, higher-order effects are important, which may involve things like the relative size of the oil sector and how much it is likely to change in response to the price shock (which depends upon real variables such as distribution of breakeven oil production costs throughout the sector, capital costs for new exploration and development, ….). This is where the “non-theory” aspect of PSST becomes important: if the situation-dependent variables dominate, no general theory will adequately predict the changes to the economy that result from a shock like this. Corollary: no general theory will specify the “correct” monetary/fiscal policy response to the shock.
Regarding the last couple of sentences, I suppose by “general” I mean “simple, in the sense of referring to concepts like the price level, aggregate demand, interest rate, etc., relative to which the shock itself may be treated as exogenous”.
The change in oil prices changes Aggregate Supply. A decrease in a resource price increases AS. According to AS/AD theory, it should increase real GDP and decrease the price level.
I haven’t read Wolfers’s article but the quoted paragraph just strikes me as wrong: relative price changes aren’t the same as tax cuts. Tax cuts are about the size of your pie; relative price changes are about how you slice it up.
What do relative price changes say about growth? I really have no idea and I doubt Wolfers does either.
He is right that lower relative prices for oil ought to lead to cut backs in oil producers’s activities. And it may have impacts on their profitability relative to recent results. But so what?
At current usage rates, the drop in the price of oil frees up between 1.1% and 1.4% of GDP to be spent on something else. An equivalent increase in price would have given us a recession.