The Down Side Of Low Gas And Oil Prices

It doesn’t seem like there should be a down side to low gas and oil prices that have made the public’s lives a little easier lately, especially during the past Holiday Season. As gas prices have gone down, consumers have been able to breathe a little easier as low energy costs, including natural gas and oil, have loosened their grip on home budgets.

So, what could be the down side?

Gas prices are lower now as a result of both national and international factors. Internationally, there has been a glut of oil on the market that has driven crude oil prices to the lowest point in six years. The low prices have hurt the Russian economy as well as the economies of other major oil producers. The value of the Russian ruble has dropped by 40 percent compared to the dollar, making it more expensive to do business with other countries whose currency has remained stable. Destabilizing the Russian economy may have other effects there as well as the government acts to keep control of the economy and maintain its international standing.

Saudi Arabia has also reduced oil prices while maintaining production in order to keep from losing customers to lower-priced competitors. However, there is some thought that Saudi Arabia has maintained its output in an effort to hurt oil production in the U.S. This is because the increase in oil and gas output by U.S. companies has been a large factor in reduction of oil prices. This is especially true of the increase in shale oil which was spurred on by the escalation in oil prices over the last few years and, with more oil on the market, prices were driven down. A drop in oil prices, even now, has made the drilling for shale oil less profitable. On January 7, the New York Times quoted an analyst and director of industry publishing company Oilpro, Joseph Triepke, as stating, “Demand for rigs is falling off the cliff.” He went on to say, “Exploration and production budgets are down anywhere from 30 to 40 percent and the cuts are happening faster than we thought.”

Low oil prices are impacting the American economy in other ways. The reduction in oil prices has affected the stock market, causing losses in the energy sector. It has also affected other large industries. On January 6, the Wall Street Journal reported that U.S. Steel plans to lay off 756 employees from plants in Ohio and Texas. The plants make pipe used in oil and gas drilling operations. The reduction in drilling has lessened the need for the output from the plants, resulting in the layoffs. Impacts are also being felt in the sectors of the banking industry that finance the energy industry and may need to deal with any defaults.

As the price of gas and fuel oil goes down, the conservation efforts made by industry and the public will seem less attractive to individual consumers. Cars that are less economical will become more attractive, resulting in an upturn of the purchase of vehicles that utilize more gas. The push for higher priced renewable energy resources, such as solar and wind energy, will lessen as the pressure on energy budgets goes down. Overall, this could result in a conservation and environmental backsliding on the part of the America public and industry, landing the U.S. back where it was before oil prices began to rise.

Low gas and oil prices have benefited the American consumer greatly since last summer when prices began to fall, but there are both international and national impacts that present a down side and may ultimately have negative economic effects on the public in other ways.