How will the big plunge in oil prices affect the US economy? Stephen Brown, an economist at the University of Nevada, Las Vegas, offers a simple map breaking things down. On the whole, cheap oil is expected to boost economic activity in 42 states (in green and yellow) while hurting it in the remaining 8 (in red):
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(Resources for the Future)
Brown's calculus is fairly simple. On the one hand, low oil prices mean lower gasoline prices. For people who consume a lot of gasoline — most of the United States, basically — the price plunge is a major boon. Estimates of the average household benefit range from $550 per year to $1,100 per year or more. Plus there are lower energy costs for airlines, shipping, and so on.
But the picture is different for eight states that rely heavily on oil production: namely, Alaska, Louisiana, New Mexico, North Dakota, Oklahoma Texas, Wyoming and West Virginia. Lower oil prices means less revenue — and, in places like North Dakota or Texas, could force shale producers to scale back their drilling. (Oil-producing states with diversified economies, like California, are much less vulnerable overall.)
On top of that, some of these oil-producing states could find themselves in a budget hole. Alaska, for one, is now facing a $3.5 billion deficit and may have to make it up by shelving infrastructure projects, increasing tuition fees, and so on. (The state has socked away a $13 billion rainy day fund for this eventuality, but that will run down if low prices persist for a long while.)
"These eight states," Brown writes, "have economies that depend on energy production for export to other states. The extent of the [negative] effects depends on the prominence of oil in the state's energy mix and the lack of diversity in the state's economy." You can read more on these nuances here.
Low oil prices should boost the US economy overall
So how does this all shake out? Assuming oil stays well below $80 per barrel, as futures markets currently predict, Brown offers some back-of-the-envelope calculations:
Taking into account the income losses for US oil companies, the net gain in US income will amount to $920 per year for each household. The average propensity to consume is around 90 percent, so the average US household could spend around an additional $825 per year.
Because low-income households spend a greater percentage of their income on energy consumption, and are less likely to own stocks in oil companies, such households will see larger gains and spend more. High-income households will spend less. The overall effect should amount to a one-time increase in US GDP of about 0.7-1.0 percent.
Obviously there are a lot of potential complications here. Oil prices might not stay low. The US shale boom might be more resilient (or more vulnerable) than expected. And so on. This just gives a very rough ballpark of the effect here.
There's a lot more in Brown's policy brief, written for Resources for the Future, about the various implications of falling oil prices — it's worth checking out.
Further reading:
-- Why oil prices keep falling — and throwing the world into turmoil.
-- What the huge drop in gasoline prices means for America.
-- My colleague Libby Nelson took a look at North Dakota's efforts to prepare for the inevitable oil price crash. We're about to find out how well they did.
