16 Jan 2015 Low Gas Prices Could Ultimately Hurt U.S. Economy, by Fred Banyon
Although the prices at the pump are nice these days, the cost of oil should probably be a little bit higher.
There’s celebration because the Dow Jones Industrial Average recently reached a new high of over 18,000, but some stock market experts think the market is long overdue for a correction. This should be cause for concern, but not panic or reason for an outright exodus of equities.
For one thing, there’s historical precedent. An Oppenheimer Funds study has shown that, on average, there have been two “bear markets” per decade. A bear market happens when there is a 20 percent downward correction of one or all of the major investing indicators (the Dow 30, Standard and Poor’s 500 and NASDAQ Composite). There hasn’t been one yet in this decade, but one could be just around the corner.
With America’s economy already fragile, a stock market downturn is not what this country needs.
Adding to jitters about the state of the market is the decline in the price of oil. Low oil prices are a great deal for consumers, but could unpleasantly shake up the economy.
Strange but true: the current oil boom in the United States brings as much opportunity as hazard.
Historically, precipitous declines in oil prices portend an economic slowdown. But that may not be the case in this instance. The drop comes from the actions of OPEC — the cartel of foreign oil producers — reacting to America’s march toward energy independence.
Some claim the Saudis are purposely not scaling back production to keep down the price of oil. Cutting oil production could drive prices higher and thus be more profitable, but oil production from shale in the United States is shrinking demand for foreign oil.
It costs the Saudis around $10 to get a barrel of oil out of the ground, so there’s still a nice profit cushion when oil is about $50 a barrel. They still benefit from lower oil prices. But domestic production of oil from shale costs around $50 a barrel. American producers are just breaking even at that price.
Prolonged low oil prices could render some American shale producers insolvent, or at least make it less attractive for them to continue operations. The lower price of oil could put the ball back in the court of the Saudis. That’s not good for the American economy over the long term. Oil prices have an impact far beyond just our gas tanks.
Of course, cheaper technology could eventually solve the problem for shale producers, but that’s not a viable option right now.
Is there a sunny side to the lower oil prices? Of course!
This oil war does bring good news to consumers. It has real, actionable benefits as it leaves consumers with more dollars in their pockets. That’s more cash to invest and save.
Leading authorities don’t believe the low cost of oil indicates an economic slowdown is imminent here or abroad.
Also, it is entirely possible that, if the Saudis or Americans blink and production on one side or the other is scaled back, oil prices will rise to where they were in the summer of 2014 — $105 a barrel — sometime soon. Motorists should take advantage of the current low prices while they last.
In the big picture, a rebound of oil prices may be painful at the pump, but it helps our oil shale producers until a cheaper means of extracting their oil is discovered. It also creates residual economic benefits (jobs!) elsewhere in our economy.
More important, our trend toward energy independence lessens our geopolitical risk of being engrossed in Middle East turmoil.
Overall, people should not panic. The way to mitigate uncertain market conditions is to stay the course by not panicking.
According to Fidelity Investments, a great way to invest is through mutual funds, which utilize the strategy of dollar cost averaging. Chances are that the savvy consumers and investors will likely not even remember this in two or three years.
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Fred Banyon, a financial literacy advocate, is a stockbroker with American Trust Investment Services in Chicago. Comments may be sent to [email protected].
Published by the National Center for Public Policy Research. Reprints permitted provided source is credited. New Visions Commentaries reflect the views of their author, and not necessarily those of Project 21, other Project 21 members, or the National Center for Public Policy Research, its board or staff.