Why are low oil prices a bad thing?

So now these old times are the good times? What kind of weird economy do we have when we have to start rooting for higher oil prices and maybe even a shortage here or there?

But root we must, at least if you believe some of the specialists in how our economy works.

The Dow today is down another 200 300 points and experts are suggesting the collapsing price oil — it dropped below $60 a barrel today for the first time in five years — can do a lot to sink our economy.

That’s because while we were complaining about high gasoline prices, reflecting the high cost of a barrel of oil, it was doing a lot to get the economy churning again after the Great Recession.

“It will subtract 0.5 percent from GDP, bare minimum,” Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, tells CNBC.

That’s a big enough threat to our economy that he suggests the U.S. might bail out the energy industry.

“We bailed the banks out and the public’s anger has been very real and very long standing,” Dennis Gartman, a commodities investor and the editor of The Gartman Letter, told CNBC. “Bailing out the oil companies would be even more seriously hated.”

In an article today, the Telegraph carries a fascinating graphic on the best and worst of the collapse of oil. The positive seems obvious — a rise in personal wealth and a higher standard of living. But the extreme of the negatives includes the notion that Russia President Vladimir Putin puts his nation on a war economy.

  • davehoug

    BAD for sellers, servicing companies, RR……good for the rest of us 🙂

    • There are two refineries in the Twin Cities. I wonder how many of the people over there might be in trouble.

      • Dave

        Are they refining less oil right now as a result of the latest price drop?

      • morlockphoto

        They’re not in trouble. Demand for gasoline isn’t down, and margins on gas and diesel and such aren’t sufferering.

        • Gary F

          Correct, local gasoline consumption isn’t down, it’s the worldwide lack of demand. The two refineries in town have been doing quite well since they buy a lot of their oil at below market prices. Both are fed by the same pipeline, the pipeline has to keep flowing, when spot demand is down for the users of the pipeline, the oil has to go somewhere, so Koch and Northern Tier get discounts to buy surplus oil and they store it.

      • Refinery capacity across the US is very tight, so my guess is existing refineries are not likely to be in trouble. I would think it does place a dimmer outlook on the need to continue expanding capacity, however.

  • morlockphoto

    The Telegraph forgot about the supply part of the equation.

    http://peakoil.com/production/the-relentless-production-of-shale-oil-is-breaking-opecs-neck

    • David P.

      Correct – demand is down, supply is up.
      And I understand OPEC (especially Saudi Arabia) intends to fight shale oil by dumping even more oil at suppressed prices on the market to deter shale production.
      Why is cheap oil a bad thing?
      While it might seem to be good for the individual, taking the longer/macro view:

      It encourages consumption of a finite resource.
      It encourages consumption of an energy source that has a high SOx, NOx, Mercury and Carbon footprint.
      It discourages energy conservation measures, both for individuals and industry (with low energy prices, the return on investing in energy saving measures doesn’t look so good).
      It discourages the adoption of clean energy technologies.
      It puts further pressure on tax-payers to subsidize the oil industry even more.
      It hurts the overall GDP.

  • Jake X. Lennington

    If you guys think the cost of oil sucks because it’s too low, then the next time you go to your gas station of choice, give them an extra $20 because you feel sorry for them.

  • Duke Powell

    Only a cloistered journalist or academic would not appreciate the economic boost of cheap energy.

    Good Lord!

  • rosswilliams

    “What kind of weird economy do we have when we have to start rooting for higher oil prices and maybe even a shortage here or there?”

    Its called capitalism. If you listened to the radio you would know that a new apple developed at the University of Minnesota, at public expense, was exclusively licensed to a small number of growers. The goal as reported by the grower group in the story was to limit the supply and keep the price up. Oh, and to allow the development of a trademarked brand for the apple that would never expire, unlike the patent on growing the apple.

    We need to understand that a higher GDP does not necessarily mean things are better. It measures what is produced, but ignores what is destroyed. So hurricanes and other natural disasters raise the GDP, but they clearly are not a good thing. Lower oil prices lower the GDP, but that may or may not be a good thing.

    As for the environment. Its possible, if the Saudi’s are successful, that the net impact of lower oil prices on the environment will be good. Less shale fracking, which is releasing enormous amounts of natural gas into the atmosphere, may more than offset any new use of oil resulting from lower prices.

    It ought to be clear that there are a lot of people who make a lot of money from higher oil prices. This story is a part of their PR campaign to start a conversation to convince the rest of us that we have some stake in putting their gravy train back on track. And it worked, people are already starting to imagine all the negative consequences based on nothing but speculation.