Plummeting Gasoline Prices Can Wreak Havoc on Economy Short Term (Mainstreet.com)

NEW YORK (MainStreet)— While declining oil prices are a boon to consumers who are saving hundreds of dollars each month, one shortcoming is that the economy could suffer from a slowdown in the near term.

“U.S. economic growth could slow for a quarter or two if the negative impacts of the cutbacks in the energy-related industries offset the positive effects in the energy consuming states,” said Paul Kutasovic, a professor of economics and finance at the New York Institute of Technology.

The dramatic drop in oil prices over the past several weeks isn’t all good news for the American economy, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University in Dallas.

Good for the Household

Of course, on an individual consumer level, low gas prices means more money to spend elsewhere.

“Most households now have more disposable income as they’re spending less on gasoline,” he said. “Lower fuel costs for the trucking, railroad and airlines industries may eventually translate into lower prices for groceries and other products.”

Americans are saving $630 million on gasoline compared with what they paid in June because of the 40% reduction in oil prices,” said Chris Faulkner, CEO of Breitling Energy, a Dallas oil and gas exploration and production company. “Consumers could get a $230 billion windfall if prices were to stay this low for a year.

“Cheaper oil prices now allow for the savings from the pump to flow into the economy and lower income households who are living on tight budgets are likely to use money not otherwise spent on gas to buy groceries, clothing and other staples,” he said. “I believe we are witnessing one of the biggest transfers of wealth in history.”

But Bad for the Economy

There are currently 32 states which produce commercial quantities of oil and natural gas while 9 million Americans owe their livelihoods to the energy industry.

“Should oil prices fall below $60 a barrel for an extended period, we can expect sizable cuts in drilling and production activity that will ripple through all sectors of the economy,” Weinstein said.

Lower oil prices will benefit the regional economies of the energy consuming states of New York and California, the East and West coasts and the industrial Midwest, said Kutasovic. In those states, lower oil prices act as an effective tax cut by boosting consumer discretionary income and at the same time lowering production costs for manufacturing firms. Manufacturers benefit from lower oil prices by paying less to run their factories as well as paying less for input costs.

Yet the impact on the energy producing states such as Texas remains uncertain and depends largely on the magnitude of the decline in oil prices. If oil prices decline enough, exploration and production companies will cut both production and capital expenditures on new projects, resulting in significant job losses and a slowing in regional economic growth in these states, Kutasovic said.

The net impact of oil prices on the economy depends on the break-even point for U.S. shale production, and recent studies suggest a number in the $50 to $55 per barrel range, said Kutasovic.

Written by: Ellen Chang, Mainstreet

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