What Will Oil Prices Do to U.S. Growth?

Oil prices have fallen from an intra-year high of $107 per barrel in 2014 to a low of $43 per barrel in March. Prices have since rebounded, but the plunge in prices over the past eight months is showing signs of a decline in energy-related production.

In May, oil and gas well drilling production fell for the eighth consecutive month, according to the St. Louis Federal Reserve’s monthly Industrial Production report. On the year, oil and gas well production is down 51 percent as declines have accelerated meaningfully over the past six months.

According to Deutsche Bank, between August 2014, when the production of oil and gas well drilling peaked, and March 2015, drilling declined 64.9 percent at an annualized rate. There have been only two other times when production fell by more over a six-month period.

Though the decline in prices may be affecting production, it could be a positive for consumers. To get another view on the decline in oil prices and its impact on the U.S. economy, we  spoke with Mark Zandi, Chief Economist of Moody’s Analytics.

 

If oil prices remain at their current range, what does that mean for the U.S. economy?

Lower oil prices are a significant net positive for the U.S. economy and much of the global economy. While the energy sector is clearly hurt, the lower prices act effectively as a large tax cut for consumers. If oil prices average $65 per barrel this year, then 2015 real GDP growth will receive an almost 0.5 percent lift.

 

What impact do lower prices have on the rest of the economy?

U.S. near-term growth prospects are good, in part due to the lower oil prices, but also because of lower interest rates and a strengthening job market which is prompting a pick-up in wage growth. While there are risks, the economy is on track to be back to full-employment by this time next year.

 

Does that mean we are already seeing the effects of the lower price trend?

Consumers have yet to spend their savings from lower prices.  Saving rates have risen significantly.  However, I expect consumers to begin spending more this summer as they become convinced the lower gasoline prices are here to stay and the savings build up in their checking accounts.

 

We know prices impact certain countries differently, but what about a regional U.S. impact?

The impact of lower oil prices varies considerably across the country. Energy producing areas that roughly extend from North Dakota south to Texas will be hit hard. Houston is the largest metro economy that will struggle with the lower oil prices. The rest of the country will benefit from the lower oil prices, particularly in the Southeast where households spend the largest share of their budgets on gasoline.

Dawn Kissi is an international cross-platform journalist covering the business, finance and economies of the world's emerging markets. She reports and produces content on sovereign and geopolitical risk, central banks, global exchanges and various sectors within financial markets. Her journalism career began in the New York newsroom of ABC News. She has since reported on a range of topics from a number of countries. She is multi-lingual and a graduate of Columbia University's Graduate School of Journalism.

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