Paying less at the gas pump is hurting the U.S. economy

By Thomas Heath, The Washington Post

This is a good news, bad news story.

The good news: Oil prices are half of what they were about two years ago, giving Americans a holiday at the gasoline pump.

The bad news: The American oil industry got whacked for its own efficiency.

The fracking era helped U.S. oil production nearly double compared with what it was just five years ago. U.S. production went from around 5 million barrels a day to nearly 10 million, almost as much as its peak around 1970.

That brought new life — profits, jobs, investment — to a declining domestic oil industry. Those oil and fracking companies spent billions of dollars to buy steel, machines, vehicles and anything else they needed to feed its growth. It also spurred more tax revenue.

Then oil prices declined because of oversupply. They went from more than $100 in 2014 to around $45 today, give or take a few bucks.

“We were victims of our own success,” said Frank Verrastro, an oil expert with the Center for Strategic and International Studies.

The price drop boomeranged on the oil companies, cutting profits and causing a spending decline on pipes, machines, vehicles and a million other things that go with drilling.

The U.S. economy felt it.

A study by the Brookings Institution said the gas windfall to consumers, which Fed Chairman estimated to be about $700 a family, “raised real GDP by about 0.7 percent since June 2014,” the Wall Street Journal reported.

“However, this stimulus to real GDP growth was largely offset by a simultaneous reduction in real nonresidential investment, reducing real GDP by 0.6 percent,” according to the report.

“The net stimulus since June 2014 has been effectively zero,” according to the report’s authors, Christiane Baumeister of the University of Notre Dame and Lutz Kilian of the University of Michigan.

If the fracking industry had not been so successful in finding oil, and creating a big new industry around it, then foreign suppliers like Saudi Arabia, Venezuela, Nigeria and Canada would have taken the hit from an oversupplied market.

“It makes the economy more vulnerable in the end if you have a bigger domestic oil sector,” Baumeister said. “The moment things are not going well, you feel the disruptive effects. There is more irony. The fact that we are producing more (oil and gas) has contributed to the price decline in the first place. It’s not all of it. But it’s still part of the story.”

Catie Hausman of Michigan’s Ford School of Public Policy wrote a similar paper on the effects of lower natural gas prices on the economy. She and her co-author found that the net benefit to consumers was just shy of $50 billion.

So the good old days when foreign suppliers would take the hit for lower oil and gas prices are gone. “Twenty years ago you could have looked at a drop in prices and say, ‘That is going to be unambiguously good for consumers,’” Hausman said.

Not anymore.

“Clearly, the oil price decline was less than the bonus advertised/believed early on,” Verrastro said. “We have lost 200,000 jobs and investment is down, meaning prices will rise in the future. When the U.S. was a bigger oil importer, lower prices meant benefits to consumers and balance of trade reduction. As we grew in production, the positive impact of lower prices was ?more muted.”

Consumers are not the only ones who might be surprised by this turn of events.

“Ironically, in the 2016 State of the Union address, the president talked positively about increased oil and gas production, reduced imports and lower gasoline prices,” Verrastro said. “By the time he leaves the White House, production will be down and imports up — with prices set to follow once the inventory overhang is worked off.”

Talk to us

More in Herald Business Journal

The 214-foot tall cranes work to unload their first cargo shipments at South Terminal at the Port of Everett on Thursday, April 8, 2021 in Everett, Wa. (Olivia Vanni / The Herald)
Renovated Port of Everett terminal gets first cargo customer

The 655-foot Westwood Columbia is the first ship to call at the newly upgraded South Terminal dock.

Project Roxy is a proposed 2.8 million square foot distribution center that would be built on a 75-acre parcel at the Cascade Industrial Center. The rendering depicts the proposed project at 4620 172nd Street in Arlington from a northwest perspective.
1,000 jobs: Amazon to open distribution center in Arlington

The company is the tenant behind Project Roxy, a $355 million building at the Cascade Industrial Center.

Garry Clark, the new CEO of Economic Alliance Snohomish County (Kevin Clark / The Herald)
At a tough time, a new CEO leads local economic development

Garry Clark has taken the helm at Economic Alliance Snohomish County, where job one is pandemic recovery.

Kathy Coffey (left) and Courtney Wooten
Leadership Snohomish County offers racial equity conference

The fifth annual day-long Step Up: Moving Racial Equity Forward will be held online on April 30.

FILE- In this Sept. 30, 2020, file photo, a Boeing 737 Max jet, piloted by Federal Aviation Administration (FAA) chief Steve Dickson, prepares to land at Boeing Field following a test flight in Seattle. Boeing says it has informed 16 of its customers that they should address a possible electrical issue in certain 737 Max aircraft before using them further. Boeing said Friday, April 9, 2021, that the recommendation was made “to allow for verification that a sufficient ground path exists for a component of the electrical power system.” (AP Photo/Elaine Thompson, File)
Boeing: possible electrical issue in some 737 Max aircraft

The company said that the new problem was unrelated to the flight-control system.

Aerospace supplier with Everett site files for bankruptcy

Wichita-based TECT Aerospace filed for Chapter 11 and plans to sell an Everett manufacturing facility.

Edmonds grocery store workers may soon earn hazard pay

Some employers are required to increase wages by $4 an hour, the city council voted Tuesday.

What local firms are doing to promote diversity and equity

Here’s how some of Snohomish County’s biggest companies and organizations say they are making a difference.

Boeing President Ron Woodard, fifth from left, breaks ground with Boeing officials to make way for the Boeing Commercial Airplane Group Headquarters Office Building at the Longacres Park site in Renton Wash. Wednesday, May 14, 1997. (AP Photo/Loren Callahan)
For sale: Boeing’s Commercial Airplanes headquarters in Renton

A large warehouse on the Bomarc property in Everett also is for sale.

Snehal Patel, Global Head of Cell Therapy Manufacturing at Bristol Myers Squibb, stand outside the facility on Monday, March 29, 2021 in Bothell, Washington. A Bristol Myers Squibb facility in Bothell is one of four facilities in the United States where the company supercharges a person's T-cells to better fight blood cancers. The facility uses a virus  -- a viral delivery system -- to add punch to an individual's T-cells. The T-cells are then returned to the person better-equipped to destroy cancer cells.  (Andy Bronson / The Herald)
Cancer patients nationwide send their blood cells to Bothell

At a Bristol Myers Squibb lab, the cells are altered and returned to patients fighting non-Hodgkin’s lymphoma.

Brett Smith, CEO of Propeller Airports, shares a scene from the March 4, 2019 opening of the commercial airline terminal at Paine Field during a Lynnwood Chamber of Commerce virtual gathering on March 17, 2021. From a screenshot.
Passenger service at Paine Field is gradually bouncing back

Terminal operator Propeller Airports foresees a possible upswing by June as air travel rebounds.

Terrie Battuello (Port of Everett)
Port of Everett economic director to join Economic Alliance

Terry Battuello will fill a newly created economic development position at the public-private nonprofit.