Low oil costs not helping

Written by Gary Silverman, CFP®

I’m not an oil expert. No matter. For the last two weeks I’ve been trying to make sense as to what has been going on with oil prices, anyway. Really though, I suggest regularly reading the column that usually is on or around the same page as this one. Alex Mills is an actual oil expert. So I’ll now leave oil to him and turn to economics.

Fact: The U.S. economy is consumer driven. There is nothing more important to it than the amount of spending we Americans do.

Fact: Americans drive a lot.

Fact: If it costs less to fill up your car, you have more money to spend than you did before.

Question: So how come with the much lower fuel prices has our economy not benefitted?

Answer: Complicated.

First, it’s even better than I’ve made it seem. There’s a lot more to oil than making gasoline to drive your car around. It also makes diesel fuel that powers our trucks and trains that transport all the stuff that makes the stuff we buy. And then transports the actual stuff we buy. It is the base component in many of the chemicals our industries use, this thing called plastic. The cost of oil is even significant to the cost of the food we eat. In other words, cheaper oil makes a lot of what we do, use, and buy cheaper.

So how come it hasn’t made our economy better? Well, it actually has. Thing is, you just can’t see what our economy would have looked like if energy prices hadn’t gone down. There is some (arguably) measurable positive effects. Energy prices are just one piece of the complicated puzzle that creates an economy. But there are two other moderating processes going on.

If you, after having a hard time post-financial crisis, begin to notice that you seem to have more paycheck left over at the end of the month than you used to, you are probably not too quick to spend it. After what we’ve been through we are all a bit more cautious before we add more spending in our budget. So it may take a bit of time before the savings creates appreciably more consumer spending.

Then there’s the negative effects of lower oil prices—and we can see it first-hand. Oil firms and suppliers of related equipment and services make less money. Jobs are lost. And this negative spiral keeps going.

The real economists I talk to tell me that in the end the economic positives of cheap oil outweigh the negatives, but it takes time for that to occur. And while it may end up being good for America as a whole, our state will get the short end of the stick during this cycle.

More on these negative effects next week.

This article was published in the Wichita Falls Times Record News on March 13, 2016.