Across the country, Americans are filling up for less. In spite of this good news to middle class families, many stories focus on the economic damage the lower cost of oil causes overseas. Despite this negative outlook, the drop in gas prices will benefit America, and the rest of the world, tremendously.
In the past six months, gasoline has dropped from about $100 a barrel to $66—a decrease from near $4 per gallon to $2.78 at the pump. Economist Larry Kudlow estimates that this will boost middle class families and the economy as a whole just as much as a $125 billion tax cut, with no spending hikes attached. Individual Americans will find themselves richer, and companies will reap higher profits, due to lower transportation costs.
Furthermore, the lower cost of oil could boost U.S. stocks, as the dollar becomes stronger than other international currencies, and as America likely surpasses Saudi Arabia as the world’s largest oil producer.
Economic Benefits in the U.S.
When the price of oil decreases, that change sends a ripple through other markets. Transportation costs fall—not just for average Americans going to work in the morning, but for nearly every sector throughout the economy. Sending food across the country becomes cheaper, energy bills go down, and it becomes easier to send any good to department stores, outlets, and directly to the consumer.
America’s shale oil boom is a major contributor to this drastic price drop. Texas oil output increased from 2 million to more than 3 million barrels per day in less than 2 years. As a separate nation, “Saudi Texas” would rank as the world’s 7th largest oil producer, beating Iraq in July, and edging closer to beating Iran.
This greater supply, rather than government spending on green energy projects like wind and solar, has shot down the cost of energy, and is already giving America’s economy a much-needed boost.
Over the last 12 months through October, Texas workers found 421,900 new jobs, with a 3.74 percent annual payroll increase, almost double the 1.93 percent increase across the country. More Texans are working and making more money due to the shale oil boom.
The benefits extend throughout the country, where GDP has grown from 3.5 percent to 3.9 percent. Corporate profits hit a new high of $1.87 trillion, or over 10 percent of GDP.
Why the Global Economy Will Benefit in the Long Run
If this development helps America’s economy this much, why are news reports overwhelmingly negative? The short answer is, vast economic change increases uncertainty, and it will take a little while for foreign markets to adjust.
While the dollar recently climbed to a five-year high, its growth is due largely to the weakening of other currencies, which are tied to falling oil prices.
Many currencies—like the Australian dollar, the Canadian dollar, and the Norwegian krone—are tied to the price of commodities like oil, so when the cost of oil decreases, the value of these currencies also plummets. In addition to these currencies, China’s yen, Russia’s ruble, and Brazil’s real also fell.
In the short term, the fall of the ruble may lead Russia into a brief recession and Nigeria’s economy is struggling in the wake of oil price drops, but the development will likely cause growth across the world as transportation costs fall.
Global oil supply has skyrocketed recently, and it will take some time for demand to catch up. American use of oil has declined since its peak in 2005, but the lower cost should turn that around in the coming months. Already, recent sales data shows that heavier SUVs and pickup trucks are coming back in style, and American oil consumption is already higher than last year, bucking the negative trend since the 2007-2008 crisis.
Markets in Russia, China, and Saudi Arabia may struggle to adjust to the new prices, and commodity-backed currencies will experience uncertainty for the time being, but over the long term, the global economy will benefit.
When the price of oil stabilizes, and when the currencies find their footing again, certainty will return to economies across the world—and oil will still be cheaper than it was. The global free market will adjust to—and thrive with—lower oil prices.
Even in America, however, these gains have not yet spurred a full recovery.
Yearly economic growth remains at 2.4 percent, while it should reach 4 or even 5 percent. The federal debt just hit $18 trillion, growing by nearly 70 percent over the past six years. Finally, Obamacare is imposing taxes on full-time employment that raise the cost of an employee by as much as $3,000 per year, according to University of Chicago Economics Professor Casey Mulligan.
The free market oil boom has done much to benefit Americans, and will extend that prosperity throughout the world. In order to encourage even more growth, Congress should enact pro-growth policies, such as lowering corporate tax burdens and cutting massive regulation. The road to recovery runs through markets, not government.