The effects of lower oil prices: on the one hand…


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The old quip,”if all the economists were laid end to end, they’d never reach a conclusion,” came into my head yesterday after I read these articles:

The short version of the two pieces: On the one hand, falling oil prices will hurt the US economy, and on the other hand they will help the US economy.  Specifically:

  1. Lower oil prices help consumers via decreases in gasoline prices and the prices of products that are sensitive to transporation costs.
  2. Lower oil prices hurt businesses and workers that produce crude oil and that supply inputs to oil and gas industries.
  3. Falling oil prices can either increase or reduce the stock prices of energy companies.  These firms are important players in equity markets and thus fluctuations in oil and gas stock prices will causes fluctuations in financial markets directly (via falling share prices) and indirectly (by affecting the balance sheets of other financial institutions that hold energy equities in their portfolios.) In the current downturn, falling oil prices are hurting American companies because they are primarily producing oil domestically and thus earn higher profits when prices.  This is in contrast to the past 70 years when lower oil prices could help company profits due to lower costs of importing oil.

The sum of all of the effects will determine whether or not falling oil prices help us or hurt us.

This should ripple down to how we teach introductory economics.  Usually we talk about “oil price shocks” like this: a big drop in oil prices causes input prices for most companies to fall and thus a higher level of GDP can be produced at a lower level of prices (and thus inflation as well.)  That’s not what’s happening today.  Instead, a falling energy prices are both helping and hurting the supply side of the economy and thus we aren’t getting the boost to short-term growth that we saw when oil prices fell in the 1980s and 1990s.

This is a classic case of why the most important thing to learn in economics is that you should answer almost every question by saying, “on the one hand… but on the other hand.” It used to drive Gary Eichten crazy when I did this on MPR but it’s the way the world works.