Dr. Mike Walden

Dr. Mike Walden

Not everyone sees a positive side to gas price decline

By Dr. Mike Walden
Business Columnist

1 Comment | Leave a Comment

A funny thing has happened on the way to the gas pump. The more gas prices have dropped, the more concerns there seem to be about the economy. Since the beginning of the year, the stock market has taken some big hits. Although we’re only a few weeks in to 2016, most economic forecasters also have already lowered their growth projections for the year.

Of course, gasoline is a direct derivative of oil, so we’re really talking about lower oil prices. Oil prices are down almost two-thirds since mid-2014. But the stock market appears to rise when the price of oil rises, and the stock market falls when the oil price falls. What’s going on?

There are three alternative reasons given for this confusing situation. One is that the U.S. economy is different today, with the nation now being an energy-producer rather than only an energy-consumer. So when the price of oil falls, it hurts production, incomes and employment in the country.

The second explanation revolves around what has caused oil prices to plunge. Did they drop because of increases in supply – which most would say is good – or from decreases in demand – which could be interpreted as signaling a weak economy?

The third explanation comes from a tossup. Some economists are throwing up their collective hands and saying, “This doesn’t make sense.” Their best story is that, with the gains the economy and the stock market have made in the last seven years, it’s been time for a pause.

Most economists dismiss the first explanation. Total employment in oil and gas extraction accounts for only one-tenth of 1 percent of all U.S. jobs and about 2 percent of national production. Plus, the industry is concentrated in a handful of states.

Furthermore, there’s the benefit lower oil prices have on households and businesses – mainly from cheaper gas for driving. Using the results from published research, I estimate the North Carolina economy has added 52,000 jobs since 2014 as a result of lower oil and gas prices.

The second explanation requires a look at the two major elements of economic analysis – supply and demand – in world oil markets.

There’s no question the world supply of oil has been increasing in recent years. Since 2008, oil production in the United States has doubled, and our country once again is a major world oil producer. Iraq has more than doubled its oil output in the last decade, and Iran soon will be selling more oil as sanctions against it are removed.

But while most countries have begun to use more oil and oil products as the Great Recession ended, one important country is bucking this trend – China. A decade ago China was increasing its annual consumption of oil by double-digit rates. Last year its oil usage rose only 1 percent, and many think China’s oil consumption soon could be falling.

Still, some economists are unconvinced that low oil prices or a Chinese economic slowdown are enough to cripple the U.S. stock market. Instead, they see the recent drops in the stock market as simply an old-fashioned correction. With the stock market today at almost triple its value during the Great Recession, and with the current economic recovery now approaching seven years old, some experts say it is just time for a pullback.

Dr. Mike Walden is a William Neal Reynolds Professor and N.C. Cooperative Extension economist in the Department of Agricultural and Resource Economics at N.C. State University.

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