The Downside of Cheap Oil

I have heard that the traders in commodities pits say high prices solve high prices. To depress rising oil prices, we just needed less demand and more production. According to the U.S. Energy Information Administration (EIA), global demand is weakening and you can see below that U.S. oil production has grown:

From: Manhattan Institute based on EIA data

Oil prices are down (futures):

And, elated, people are talking about an invigorated consumer. Spending less at the pump, she has more to enjoy elsewhere:

The Tradeoff

However, there is no free lunch. While the consumer is benefitting, the oil producers that fueled our economic recovery are not. You can see below the oil and natural gas job creation:

With Texas leading the way, those jobs came from these major oil and natural gas producing regions:

When price drops and producers cut back, a ripple of contraction moves through the industry. This week’s Barron’s suggests an initial 0.25 percent boost in economic growth from lower oil prices will be more than offset by shale oil cutbacks that become “uneconomic” because of lower prices.

You can see that oil prices are already below some breakevens:

Our Bottom Line: GDP Growth

Affecting the gross investment and consumer spending components of the GDP (government expenditures and exports minus imports are the other two), lower oil prices are a plus for consumers and a minus for business investment. Which do you choose?