Consumers may be smiling at the gas pumps these days, but will the U.S. economy ultimately suffer? With oil prices below $56 a barrel, drivers are happy but American oil producers and states in which the economy depends on the production of oil may be headed for hard times, according to Wyoming Governor Matt Mead.
“If oil drops five dollars a barrel, that’s about a $17 million loss to our general fund and $17 million to schools in Wyoming — a total of about $35 million.”
Mead said that lower gas prices will benefit his state in the short term. This is due to the fact that residents of Wyoming drive between towns that are hours apart instead of minutes, as in many other more populated states.
But he stressed, “If we see low prices continue for some time, we’ll see rigs start to lay down. And it’s not just the direct revenue. It’s the hotels, restaurants and all that goes with that.”
All the jobs that will be lost also need to be considered. There is some irony to the falling oil prices and that is the fact that U.S. oil companies using hydraulic fracturing and horizontal drilling technologies is partly responsible. Obviously, the main reason for the drop in fuel prices is the dramatic drop in oil prices , which is noteworthy since they were well above $100 just this past summer.
Of course, the United States’ advances in oil production are not the only contributors to this drop in oil prices. Other factors include development of more energy efficiency in all areas of the European economy, an increase in Russia’s oil production and better fuel economy in cars driven by U.S. drivers.
According to Ron Joelson, executive vice president and chief investment officer at Northwestern Mutual, the world in general will benefit from this drop in oil prices but some countries will benefit more than others.
“Probably the biggest to benefit are those in the agricultural sector because agriculture takes a fair amount of energy and oil.”
Joelson believes that countries with high agricultural output like India and South Korea will have a positive impact. Japan, Germany and China will also be positively impacted because they are major consumers of oil as well. Joelson says that the impact on the U.S. as a whole is not quite as clear. He says it depends on the question, is it a supply factor or is it a demand factor. Joelson thinks it’s a little of both. Although not all economists agree on the percentage of supply versus demand, they all seem to agree that the U.S. economy will come out on the positive side of the impact, according to Joelson.
Mead pointed out that oil producing countries like Saudi Arabia cannot allow prices to remain this low forever.
“They have to have prices [at a] certain level themselves because so much of their revenue is committed to their citizens. Their unemployment rate is exponentially high.”
So, the big question is, just how much longer will these lower oil prices be making U.S. consumers smile?
[Image via America and the Global Economy]