Why the Low Cost of Oil Isn’t So Great for the Economy

Oil prices are plummeting. Although motorists are smiling at the gas pumps, the economy as a whole doesn’t respond with as much positivity. When fuel prices drop, employees of the oil and gas industry feel the first ripples of the downturn, followed by everyone who has a hand in the energy business.

Why are Oil Prices Low Right Now?

An estimated 250,000 oil and gas workers have lost their jobs as the United States endures the lowest oil prices since the 1990s, according to the New York Times. Fewer people are investing in oil and gas exploration, and as many as two-thirds of the active oil rigs have been shut down. Oil that once sold for $90-100 per barrel is at historic lows hovering around $30 a barrel.

In essence, the current low cost of oil is a byproduct of unbalanced supply and demand. Oil production in the United States has doubled over the last several years. But this increase is too much too fast. While production escalates, demand declines. Energy efficient vehicles require less fuel or no gasoline at all. Solar powered homes don’t require natural gas. The need for these natural fuels is waning.

Economists feel the Organization of the Petroleum Exporting Countries (OPEC) should intervene and mandate cutbacks on oil production to make the commodity more valuable. But, none of the companies want to be the first to ease up on production, because they fear a loss of the market share.

How do Low Oil Prices Affect the Economy?

As oil and gas producers do start decreasing production, their employees and investors are feeling the sting. In addition to job loss and reduced royalty payments to landowners, the lack of exploration and production trickles down to equipment manufacturers, refinery workers and gas station owners who sell less and earn fewer profits as barrel prices fall.

Oil company shares are also on the decline. According to The Guardian, “Analysts estimate that profit for all S&P 500 companies in total are on track to be down a recession-like 5.8% for 2015.” And that has stockholders worried. Thirteen of the top 20 stock price losers in the S&P 500 are energy companies.

Banks that back exploration and production activities are also seeing a decline since business is slowing. There’s simply no income to pay back oil and gas loans, which is leading to an increase in bankruptcies.

The oversupply of oil is oppressing towns that are heavily reliant on the jobs, income and cash flow from the industry. When workers lose their jobs, they can’t pay their bills, spend money at the local businesses or keep up on mortgages. The unemployed will move to find new work, foreclosures will increase, and small businesses go under due to lack of revenue.

The ebb and flow of oil pricing have a wide-reaching effect on the economy. If you’re planning a cross-country road trip this spring, the low prices will be a welcome sight. However, if you’re making a living on an oil rig, you’re probably concerned about the future of your employment.

If you want to learn more about oil and gas production, how to earn mineral rights royalties or how to make money from the minerals in your land, contact BWAB today.