The first to feel the pain when prices slide are oil-producing states like Texas, Alaska, North Dakota, and Louisiana. When prices fall, it is not as profitable for oil companies to drill or extract oil from shale (frack). As operations have slowed or ceased, industry workers, many of whom are paid in excess of $30 per hour, have suffered layoffs. And as prices continue to sink, subsequent rounds of layoffs have typically ensued.
What’s worse, the industry, which had, since 2005, committed billions to fracking activity, has sharply reduced investment levels, contribution to suppressed growth in such industries as manufacturing and heavy equipment, financial services, even commercial and residential real estate. Moreover, according to Goldman Sachs, for every oil industry job slashed, three will be lost in other industries as laid-off workers stop spending.
Further, since the start of 2015, non-oil-industry workers have also been keeping their wallets shut. Whether due to higher debt levels and limited access to credit — as posited by Vipin Arora, an economist with the U.S. Energy Information Administration — or simple lack of confidence, the boost in spending, (anticipated even by Federal Reserve Chair Janet Yellen) has not materialized.
Low oil prices can also have a negative effect on the U.S. stock market. In fact, at the time of this writing, oil prices appear to be imposing a more direct and immediate impact on the market as a whole than at any time in recent memory. As so many workers have invested retirement money in stocks, the volatility can leave them feeling vulnerable, spooked about the future. Wary consumers are less inclined to spend than save.
Finally, plunging oil prices can inflict damage on the global economy. Major oil-producing nations such as Venezuela and Russia have already watched their export revenues take a hit. As prices continue to slide, the net effect on economies outside the U.S. could prove powerful enough to trigger a global downturn, especially when added to such dynamic factors as the economic slowdown in China (which is in part responsible for lower oil demand). And as we have seen in recent years, the U.S. is not immune to the effects of financial developments outside its borders.
The upshot? The next time you see gas prices on the downswing, revel in the momentary feeling of satisfaction. Then allow an eye toward the ramifications to direct your financial decisions.
