Naysayers about Cheaper Oil are Missing the Big Picture

Thursday, a panel of 69 economists surveyed by the Wall Street Journal discussed the economic impact of the weak oil market, noting their concerns that the low price of oil is causing a drag on capital expenditures by energy companies.  The article claimed that cheap oil is “a double-edged sword for the economy given how it might affect the boom in U.S. oil and natural-gas production”.  While there may be some truth to that statement, one edge of the sword is far duller than the other.  Capital investment has not even begun to exhibit the “sharp pullback” that the the economists are predicting: they only cut their forecast for the increase in plant property and equipment by 1.5%, and that is still only an estimate – such forecasts are often off by even more than 1.5% as it is quite difficult to predict how the economic landscape may change over the course of a year.  As demonstrated by this graph from QZ, even though the US oil rig count is down, production is still rapidly climbing.

US Oil Prod

The slide in oil prices began almost nine months ago now, and it’s clear that production shows no signs of slowing down, especially since prices seem to have bottomed out and are now back on the rise.  While it may look like the energy sector is going to take a hit this year, I doubt that will be the case as prices continue to bounce back and growing US oil producers seek to lock in capital investments before interest rates begin to rise, which will likely occur sometime midway through this year, as indicated by the Fed and reported by the New York Times.  On top of that, the US oil production industry is still growing rapidly, and it seems likely that producers would want to ramp up investment now so as to carve up their slice of the market before it fully matures.

So while the Journal’s economists did still admit that cheap oil was a net positive on the economy, they might be overplaying the threat of a drop in capital investment.  The availability of cheap oil will not only continue to drive up consumption and thus overall business growth, but will spur investment from other sectors that benefit from cheaper energy.  As transportation-focused industries take advantage of the low prices by increasing their own investment, demand for oil will grow, strengthening the case for oil producers to keep increasing production.

 

One thought on “Naysayers about Cheaper Oil are Missing the Big Picture

  1. Yichuan Wang

    I think you should give these writers the benefit of the doubt and consider the effect of collapsing oil prices on the time path of GDP. From my view there are three stages. First, there is the immediate effect of higher incomes for consumers. Second, there is the capex effect. In the long term other industries might start to take advantage of lower input prices to expand production. Given that energy capex is a substantial part of capital expenditures, you should take the potential effect of the oil slowdown more seriously.

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