Will Lower Oil Prices Spur Economic Activity?

A slow summer day, mixed earnings for two symbolic companies, and dropping oil prices present a mixed bag for a sluggish global economy.

It’s another slow summer day. Caterpillar reported weaker-than-expected earnings as the higher dollar and weakening foreign activity hit earnings. On the other hand, GM reported good earnings on strong truck and SUV sales in the United States. Caterpillar and GM are important because they are symbolic of the general state of the global economy. The world is sluggish, while the United Sates is forging ahead.

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Speaking of sluggish, the price of oil closed less than $50 a barrel for the first time since April. After a period of stability around $60, experts declared oil would continue to trade around $60 with a tendency to move higher. Today, those experts are talking of $40 oil. The demand for oil this year is running approximately 1.6 million barrels more than 2014 demand. The problem with oil is not demand; the problem is supply. Although new drilling has slowed in the United States, existing wells keep pumping. OPEC continues to cheat on production to make up for revenue shortfalls, and Iran is another new source to deal with.

Californians are still paying more than $4 a gallon, but outside of the state, consumers will continue to enjoy lower oil prices; however, they have yet to show a tendency to spend the windfall. Unfortunately, the price likely means more downside for the oil patch. The lower price of oil does benefit consumers and businesses, and these effects do matter. It’s just that we’ve yet to see evidence that lower oil really moves the needle on economic activity.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

July 23, 2015

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