One way that low oil prices are very clearly hurting the economy.

Two Ways That Low Oil Prices Are Very Clearly Hurting the Economy

Two Ways That Low Oil Prices Are Very Clearly Hurting the Economy

Moneybox
A blog about business and economics.
Jan. 21 2016 1:23 PM

Two Ways That Low Oil Prices Are Very Clearly Hurting the Economy

Oil_Drilling
Sunset in the oil patch.

Reuters

Is cheap oil good for America?

For a while, the answer seemed like an obvious yes. When the price of crude drops, the U.S. spends less money importing it from abroad while families and businesses save money on gasoline and other energy costs, which they can then go spend elsewhere.

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These days, the answer seems a little less obvious. The fracking boom turned the oil and gas industry into an noteworthy source of growth after the recession. Now that the price of oil is collapsing, drillers are cutting back by mothballing rigs and abandoning new projects. Some are worried that the bust is damaging the whole economy. 

A couple of the effects are obvious. First, employment in the fossil fuel industry has fallen significantly. Oil and gas companies, and the businesses that provide support services to them, have shed 114,000 jobs since January 2015.

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The oil rout has also hurt business investment by more than you might expect. Spending on mine and oil-well development fell significantly during 2015. In the third quarter, it shaved about one-third off the growth rate for all private fixed investment, which includes everything from new factory equipment to office buildings to housing to rigs. Oil might not be an enormous part of the U.S. economy. But thanks to the mad rush to frack every last bit of shale in the United States, it has been responsible for a decent chunk of our recent capital spending. Now, that growth engine has been shut off.

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The oil industry's problems are also probably doing harm to the economy in ways that don't show up quite so clearly in government data. Banks have loaned lots of money to drillers that could be headed for bankruptcy, and if those debts go bad, they may lend less in general. Laid-off rig workers aren't spending at the mall. Manufacturers are seeing fewer orders for drilling equipment. These sorts of downstream effects are why some investors are nervous that an oil recession could balloon into an actual recession, especially as the industry continues to retrench this year.

But try to keep all of this in perspective. While the oil and gas industry might have shed 114,000 jobs last year, the economy still added 2.6 million. The slowdown in shale country might have hurt business spending, but at most it only shaved a few decimal points off of growth (that said, we'll see how the fourth quarter data look later this month). At the same time, small businesses seem to be investing more, thanks to their windfall from energy prices. And while consumers don't seem to have been spending their savings from gasoline, they could start to once it becomes clear the low prices will be around for a while. Immediate pain aside, cheap oil might well still be good for the country in the long term.

Jordan Weissmann is Slate’s senior business and economics correspondent.