Here’s Why Cheap Gas Prices May Actually Be a Very BAD Sign for the Economy

By Daisy Luther

If you’ve been to the gas station lately, you probably just about turned cartwheels. I know that my last fill-up was almost $15 less than it was a few months ago, which goes along with a recent report that prices are the lowest they’ve been all year.

While this seems like a great thing, I have some unfortunate news for you. Cheap gas prices can actually be a BAD economic sign.

It boils down to a few things:

• How this affects the oil industry


• How great a part of the GDP that the oil industry is


• How this affects the market

While these plummeting prices are awesome today, they could be the precursor to an oil industry crash. In turn, this could lead to an economic collapse like the one in Venezuela.

Here’s what the economic experts say about cheap gas.

Vipin Arora, an economist with the U.S. Energy Information Administration, did some research that says plummeting gas prices aren’t good for everyone.

The story is essentially about consumption, which accounts for around 70% of inflation-adjusted U.S. GDP. Consumers have greater disposable income and increase expenditures on non-fuel goods and services. These rises filter through to investment and employment, and are counterbalanced somewhat by higher imports. The reemergence of the U.S. as a major oil producer has complicated this narrative: lower prices have a negative effect on production, investment, and employment in oil and gas extraction and related sectors. The question is about the balance between these forces—holding everything else constant, do the falls in production/investment dent or even reverse gains in consumption?

I will argue in this paper that it is possible. The reasons are unsurprising: (i) oil production is a much larger part of the U.S. economy than in the past; and (ii) high debt levels, especially for low-income families, have lowered consumer spending in response to cheaper gasoline prices. Access to credit, particularly home equity loans, has also slowed consumption growth, as has slow wage growth, and an aging population.(source)

So basically, there are two reasons why cheap gas prices may not be so good for Americans:

1. The oil sector is a much larger part of our GDP than it was before. This means the decreased price affects everyone whose livelihood is related to that industry. From the paper cited above:
   

   The benefits to consumers could be around $140 billion from gasoline savings. But the losses on the other side due to lower production, less investment, less build-out of infrastructure could be around that amount. So we’re kind of at a wash.

   
   


2. People who are really broke (and there are a LOT of those people) will not realize enough savings to go out and bolster the economy with all of their newfound money. $15 a week (I’m projecting this based on what I saved) isn’t going to make a huge difference to people who are really struggling in a way that will be greatly beneficial to the wider economy.

An article last year from Bloomberg also paints a pessimistic picture about low oil prices: