In my hometown, there is an infamous cross-section of two major roads known as the “Four Corners.” The traffic is so persistent that four gas stations, one on each corner, set up shop when gas prices in the New York metropolitan area hovered around $3. But after the precipitous drop of oil prices in 2014, one by one they closed up shop until only one remained.
Drops in gas prices thrill many Americans. Every day, around 85 percent of Americans drive to work, including carpooling. However, cheap gasoline could be dangerous for the United States’ economic growth. In 2015, after the drop in Brent crude oil prices from over $100 to the $50 and $60 range, the U.S. Government estimated that drivers saved $100 billion.
In 2017, the U.S. imported 10.14 million barrels of oil per day, yet we also produced 9.35 million barrels per day. So when oil prices decline, the American oil industry suffers along with anything that is associated with it.
There might be some environmentalists that cheer or shrug off the negative effects on the oil industry. They might say, “The world is shifting toward renewables anyway.” But lower oil prices could disincentive research and expansion of wind farms and solar energy facilities. If oil prices continue to drop, then energy prices in general drop with it. This could cause profitability projections for renewable energy plans to tumble.
Thankfully, in the United States, we use little oil for electricity directly, but all energy markets are connected through various networks. So, a decline in oil prices will likely have little effect on renewable energy projects geared toward powering homes and businesses. But in countries where oil is used for electricity, renewable energy projects may be halted.
About six to seven months ago, when President Donald Trump’s administration pulled out of the Iran Deal, oil prices rose to levels not seen since 2014. After stabilizing, Brent crude oil rose to the low $80 range just two months ago. Since then, international markets have shown no mercy.
A possible reduction in production might allow for some stabilization. OPEC is meeting in Vienna this week to consider supply cuts. Russia might be willing to cooperate with OPEC on a supply cut as well. This would likely help the S&P 500 energy sector, which has struggled because of the fall in oil prices.
The fall in oil prices could still be a net positive for the economy. However, the geopolitical effects are unknown and could spell trouble for the Middle East — a region already prone to instability due to oil (among other factors).
After the Houthi rebels took control of Yemen’s capital, Sanaa, Saudi Arabia led a coalition against them because of their suspected ties to Iran. This all occurred between 2014 and 2015, just as oil prices dropped. Moreover, ties between the Houthis and Iran were weak at best. Saudi Arabia’s intervention had more to do with asserting than defending itself. The decline of oil prices did not directly cause the Yemeni Civil War, but it certainly had some effect.
The U.S. economy will likely benefit, on net, from the continued decline of oil prices. More money will be saved by the average American who drives to work and buys plastic products. But oil price volatility will not be contained in the economic sphere alone.
