Why We Shouldn’t Cheer Just Yet For The Drop in Gas Prices
The price of oil dropped nearly 25% on Monday, March 9th, 2020, to mark the largest daily drop in price for the commodity since the Gulf War in 1991. A standoff between OPEC, the Saudi-led Organization of the Petroleum Exporting Countries, and Russia was sparked after Russia refused to agree to oil production cuts. Thus, Saudi Arabia moved to produce oil at cut-rate prices fueling oil’s drop to the lowest price point since 2016.
This impact on oil effects the United States, from cheaper gas prices at the pumps, to cheaper input costs for many American manufacturers. Since the United States became a net exporter of oil products in November 2019, the overall outcome of oil prices dropping is not a positive one for the U.S.
Morgan Stanley has estimated the drop in gas prices could eventually add an additional $125 billion in extra disposable income to consumer wallets.
But what many consumers and officials are overlooking is why OPEC and Russia are dealing with the issue of coordinating production cuts in the first place. Due to a boom in shale production in the United States, and after becoming a net exporter, the U.S. ultimately exported about 90,000 more barrels than the country imported. The growth was noticed by OPEC players who hoped to coordinate production cuts in order to stabilize prices, before resorting to dropping prices across the board.
B. Riley Wealth Management Chief Investment Strategist Paul Dietrich stated, “You’ve got to remember, what Saudi Arabia and Russia are doing is trying to put the shale producers out of business in the U.S. because they are the ones who are increasing the world’s supply.” Lower oil prices combined with U.S.’s high cost of production increases the likelihood of a drop in investments.
Further, because of the coronavirus coming to play and fears continuing to rise, Morgan Stanley suggests that the pain of lower oil prices will ultimately have a negative effect on consumers because of the virus keeping people away from spending these expected savings.
What most consumers are not aware of is, this drop in oil prices could ultimately be “enough to reduce real GDP growth by about 15 to 35bp in the near term” says Morgan Stanley’s research team.
Oil has employed hundreds of thousands of workers in America alone and is a booming business in states like North Dakota, Texas, and Louisiana for example. In the past, back in the end of 2015, over 60,000 jobs were lost in correlation to the drop of gas prices. If gas prices continue to fall, this is bound to happen once more, and with all the talk of coronavirus in play, this time it could be more detrimental.
