Benefits of oil slump diluted, analysts report

Energy sector investment declines as consumers gain

Graphs showing the mixed results of low oil prices.
Graphs showing the mixed results of low oil prices.

When oil prices began to decline in 2014, many analysts and economists believed the slump would stimulate growth in the U.S. economy.

But as the oil slump persists, their views on the effect it has had on the economy are now mixed as the results have proved to be good and bad, leaving some to question if the current downturn in prices is bringing any benefits to the economy.

"The magnitude and duration of the slump in oil prices has far exceeded what we originally expected and the longer it persists, the harder it is to argue that the decline will ever be a net positive for the U.S. economy," said a recent report by Capital Economics.

The crux of the problem is whether the benefit of consumer savings from lower energy costs, mainly low gasoline prices, is outweighing the decline of investment in the nation's energy sector.

Oil prices were more than $100 a barrel in 2014 when they began to fall because the world became oversupplied with oil and demand weakened. Oil prices have fallen more than 70 percent since 2014.

As oil prices began to decline, many analysts and economists viewed it as a positive for the economy, equating it to a tax break for U.S. consumers who would get relief through lower gasoline prices.

Some still believe this, but others say that because it has not led to a significant boost in consumer spending, the benefits are muted.

"We are the world's largest consumer of energy and this is very positive to the average consumer," said Rob Lutts, president and chief investment officer for Cabot Wealth Management. "I think there is a significant positive. Is it being fully appreciated in today's financial market? Absolutely not."

The national average of retail gasoline on Friday was $1.76 a gallon, down from $2.15 a year ago. In Arkansas, gasoline averaged $1.56 a gallon, down from $2.03 in 2015.

Household spending on gasoline has fallen by $115 billion since mid-2014, and instead of spending increasing, personal saving has grown by about $120 billion since late 2014, according to Capital Economics.

About two-thirds of gross domestic product is driven by consumer spending, so if people are not making purchases with their gasoline savings then it holds growth back a bit, Lutts said, adding that he still thinks lower oil prices are a positive for the economy.

Initially, it was believed that consumers were not spending their gasoline savings because they thought it was a temporary windfall.

But now that prices have fallen further in the past two years, analysts and economists say consumers are saving the extra money or using it to pay debt.

"I think people are doing more adjusting to their savings and discipline financial activity than just spending," Lutts said. "The reality is their balance sheets are improving because of this decline in oil prices."

Other parts of the consumer spending puzzle include stagnant wages and the fact that people set budgets for gasoline.

While consumers may be spending less of their money in their gasoline budget, the funds are still set aside for that purpose, said Kathy Deck, director of the Center for Business and Economic Research at the University of Arkansas at Fayetteville.

Retail gasoline demand got a boost in 2015 as record low prices encouraged U.S. consumers to drive more.

"Consumers are acting very much in a way we would expect them to when gasoline prices go down, they are driving more miles," Deck said.

But, she said, "We have really not seen an uptick we would expect in consumer purchases outside of those gasoline stores. It hasn't hit the whole economy in a way we might have expected it to."

While consumers have gotten a boost in savings from the decline in oil prices, the slump has roiled the U.S. energy sector, sending the balance sheets of oil companies from Murphy Oil Corp. to Chevron into the red.

Energy companies have been forced to cut their capital budgets, idle drilling rigs and lay off tens of thousands of employees.

Investment in the nation's energy sector had grown in recent years as a result of the U.S. shale revolution. But as production rose from the shale formations, the global oil glut began to take form.

The surplus now lingers as OPEC refused to cap its output and U.S. production remains strong despite a pullback in drilling activity in the United States.

"One could look at it as the energy sector is contracting," said Andrew Lipow, president of Lipow Oil Associates LLC. "There's clearly areas of the country that are being very negatively affected by low oil prices."

The decline in oil prices has resulted in a more than $65 billion reduction in mining structure investment in the first three quarters of 2015, subtracting 0.4 percent from overall GDP growth, according to Capital Economics.

"As a net importer of oil, lower prices should have boosted real economic growth in the U.S. Instead the hit to domestic investment has been unrelenting, while households still haven't spent any of their savings," the report by Capital Economics said.

Analysts expect investment in the sector to fall further in the first quarter of 2016 as energy companies are already announcing further spending cuts and layoffs.

Murphy Oil Corp. of El Dorado said last month that the company is reducing its spending 62 percent to $850 million this year. This comes on the heels of a 30 percent cut in spending and 20 percent cut in employees in 2015.

The company said its capital budget could be reduced further this year should low oil and natural gas prices persist.

Southwestern Energy Co. has also said it will lay off about 1,100 employees nationwide in response to low natural gas prices. The cuts include about 600 employees in Arkansas -- about 50 percent of its workers in the state.

"The average [exploration and production] company in this country has cut their budget at least 50 percent, if not more," Lutts said.

Before the decline in the oil prices, the energy sector made up about 9 percent of the U.S. economy. Now it has been reduced to about 5 percent or 6 percent, Lutts said.

Still, Deck and Lutts say, it's too much to say that low oil prices are bad for the economy.

"There's always winners and losers," Deck said. "It's undeniable that it makes it easier for any consumer to make things work when prices go down. It does make life easier for consumers to make their budgets work."

SundayMonday Business on 02/07/2016

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