Tom: This morning we are talking about low oil prices, is that right?
Mellody: It sure is, Tom. This past week, the price of a barrel of oil fell again, and for the second month in a row is under $50 per barrel. We have not seen oil prices stay this low for this long since the Great Recession. You might be asking yourself why this matters, but it does! The price of oil has a big impact on numerous aspects of our economy, and is itself affected by a number of factors. So this morning, I want to talk about why oil prices are so low, what this means for our economy, and for consumers like you and me.
Tom: OK! Let’s begin with why are oil prices so low right now.
Mellody: There are a number of negative consequences that result from these record low oil prices, and a major one is that it is hammering the energy industry hard, resulting in numerous job losses. Companies are really trimming their labor forces to deal with losses. In total, over 100,000 jobs have been lost in the energy sector since oil prices began their free fall earlier this year. Now 100,000 jobs is not a huge number in the big picture, especially since the U.S. economy is creating nearly twice that per month, but for cities like Houston, Texas that are very dependent on the oil sector, these numbers add up, especially because jobs in this sector pay very well.
Tom: Any other negatives?
Mellody: One interesting piece is the environment, where you see both negatives and positives. Low oil prices do make more environmentally friendly energy technologies, such as solar or wind power, less competitive. When oil prices were high, these technologies were expanding rapidly because they had gained greater competitive advantage. On top of that, when gas prices are low, people tend to use more of it, and burning more oil increases carbon emissions, which contribute to climate change.
However, on the flip side, low prices mean that producers are not drilling more wells, and it makes some more environmentally harmful types of oil – such as the oil sands in Canada – less cost-effective. So the environmental impacts of lower oil prices are not cut and dried.
Tom: Now for the good news – there is good news, right?
Mellody: There certainly is good news, and I mentioned one of the big positives a bit ago, Tom: lower gas prices. While that may cause people to use more gas, in the U.S., rather than increasing people’s usage of gas, it generally just saves people money. The rule of thumb is that for every one-cent drop in gas prices, Americans save $1 billion. Since this time last year, gas prices have dropped by $1.04 nationwide. That is $104 billion back in consumer pockets that they can save or spend, and that’s a big deal. Consumers also benefit from lower energy prices in other ways as well. In the Northeast, heating oil will be much more affordable this year, and both consumers and manufacturers alike will see savings from lower transportation costs for goods.
Tom: Great to know! Thanks for joining us, Mellody!
Mellody: Great to be here, Tom!