What Does a Drop in Oil Prices Mean, Anyway?

Newspaper headlines, magazine covers and Internet homepages have been dominated recently by news of spiraling oil prices. Consumers are noticing the deflated prices at the pumps and enjoying keeping more money in their wallets after a fill-up. But, what is the greater impact of dropping oil prices? Because VAST is not invested in the energy sector and doesn’t profit from optimism or pessimism when it comes to oil prices, I’m hoping to provide an unbiased, simple look at these dropping oil prices and what the ripples might be.

Oil Prices are Low, Real Low

Since last June, the price of crude oil per barrel is down $60 (from $109 down to $49), according to the West Texas Intermediate, which is the market benchmark we generally use stateside. The reason behind the drop is multi-faceted, with the major causes being a spike in supply here in the U.S. and less consumption in major global players like Europe and China. It might seem impossible to have a dramatic rise in supply when talking about a finite resource like oil, but with the advent of new technology and practices, such as fracking, experts now are catapulting their estimates for how much extractable oil remains beneath us in major oil-field states like North Dakota and Texas. While fracking is making headlines because of the controversy surrounding the environmental soundness of the practice, it is currently one of the major reasons we are able to pull so much oil out of the ground--oil that was previously unattainable.

For more on the “why” behind the current drop in oil prices, check out this short video explanation on low oil prices published by CNN Money.

Low Oil Prices: Good or Bad for the U.S. Economy?

Arguments can easily be made to favor both sides of the low-oil-price coin. On one hand, a significant drop in oil prices hurts energy companies like Schlumberger Ltd. and Halliburton, which causes a dip in their stock prices and leads to layoffs. There are major-player corporations--such as Exxon Mobil--that primarily rely on pulling oil out of the ground and selling it for a significant profit. Therefore, when the profit margin is razor-thin, major oil corps have to cut jobs to stop the bleeding. A boost in lost jobs in a short period of time is a major hit to state economies with large oil dependence, like Texas.

On the other hand, a drop in oil prices benefits consumers at the pump. In fact, a report published by Citigroup “showed that a family will save more than $1,100 a year with today’s gasoline prices averaging $2.14 a gallon--about $1 lower per gallon than in early 2014. This is important because consumer spending accounts for two-thirds of the nation’s economic output.” To offer a comparison, production of oil and gas in our country accounts for less than 2% of our GDP, while almost 70% comes from consumer spending. So, by looking at the impact of low oil prices from this perspective, more money in the pockets of U.S. consumers is a good thing--both for consumers and for our national GDP. The impact of low oil prices goes a lot deeper and broader than this post can cover. However, with all the hub-bub out there about low oil prices, the team at VAST wanted to publish an easy-to-digest, unbiased look at the general implications of dropping oil prices. Experts believe oil prices are now close to the lowest they will go per barrel. However, when a rebound will happen is unknown--it could be quite some time before we see the $100+ barrel prices that were common throughout 2014.