3. The U.S. really is a petro-state (for now)
Axios' Ben Geman writes: The history of low oil prices juicing the U.S. economy was broken during the pandemic-fueled price collapse, Dallas Fed economists argue in a new commentary.
Why it matters: "[O]n balance this oil price decline has weakened rather than strengthened the U.S. economy, making this event different from past episodes of falling oil prices," they write.
What they found: Normally, low gasoline prices stimulate help the economy because people have more money to spend on other things, while high prices act as drag on growth.
- But these are not normal times! "Shelter-in-place policies greatly and almost instantaneously reduce the gasoline expenditure share, thereby limiting the direct effect of lower oil prices on domestic consumers," they write.
The big picture: These tragically strange circumstances followed more structural changes over the last decade as U.S. production soared and petroleum imports fell.
- The growth of the U.S. oil industry means that when it deeply cuts investment, which is happening now, it hits the wider economy.
- That drag on investment "can be large enough to offset any consumption stimulus" from low prices.
- Meanwhile, in most other industries, the downward pressure on production costs from low prices is actually quite small.
Of note: By late 2019, U.S. net petroleum imports were negative, meaning that regardless of how much more consumers spend on gasoline, lower oil and gas prices do not mean that aggregate spending in the U.S. economy rises.
The bottom line: "In the current environment, the sharp reduction in capital expenditures by oil companies explains why this oil price decline, on balance, actually hurt U.S. investment spending — and hence, economic growth — not only in oil-producing regions, but overall."