The Impact of "Lower-For-Longer" Oil Prices on the U.S. Economy

The Impact of "Lower-For-Longer" Oil Prices on the U.S. Economy

June 01, 2020 | Energy & Utilities

The price of a barrel of U.S. West Texas Intermediate (WTI) crude oil became negative $37.63 per barrel on April 20, 2020, amidst an unprecedented supply glut and collapsed demand. Dwindling U.S. oil prices are largely attributable to mounting oil volumes in the country’s storage along with a dramatic decline in consumption, triggered by the COVID-19 pandemic. Lower than expected oil demand as a result of paused manufacturing operations under lockdown measures, suspended flights and travel, and halted businesses rendered oil prices sub-zero. In addition, the disagreement sparked in early March between the Organization of the Petroleum Exporting Countries (OPEC) and Russia added fuel to the fire of plummeting global oil prices.

Potential Detrimental Impact on the US Economy

Since the United States is a net exporter of crude oil and a major global oil producer, several thousands of direct and indirect jobs in the sector are expected to be impacted to varying magnitudes. According to the American Petroleum Institute (API), the U.S. oil and gas industry sustains close to 10 million jobs while generating over 8% of the national GDP. However, the colossal drop in oil prices on account of dual supply-demand shock has rendered U.S. shale drilling uneconomic, in turn posing potential damage to the country’s business investment.

The U.S. economy has dramatically contracted by 4.8% in the first quarter according to the Department of Commerce. This steepest shrinkage of the country’s economy in over a decade is projected to deteriorate further in the second quarter, in part due to the expected “lower-for-longer” oil prices. Subsequently, across the oil industry, potential bankruptcies, layoffs, stalled capital spending and loan defaults may soon surface amongst other economic disruptions.

A prolonged low oil price scenario amidst the pandemic is projected to impact wide-ranging industries, encompassing travel and tourism, food and beverages, retail and several other businesses. Consumers and businesses are likely to respond inadequately to substantial equity declines and increased market volatility. Moreover, the Federal Reserve has recently indicated a potential "wave of bankruptcies" that could hurt the country’s economy with more fiscal assistance being needed to prevent and minimize the economic damage.

Countermeasures and Legislative Aid

To combat the plummeting economy, the Federal Reserve is granting open-ended asset purchases with certain lending facilities, intended to improve credit flow to households and businesses that are severely impacted during the pandemic. Additionally, fiscal aid for small industries amongst other measures are underway to prevent businesses from going bankrupt while sustaining consumer demand. As for the energy industry, with crude prices at an all-time low, U.S. oil firms are adopting aggressive measures to shield their balance sheets, predominantly through production cuts. Recently, major energy companies revised their annual capital spending for 2020, with a reduction of 20% to 30% in the budget to survive these lean times.

Conclusion

The impact of declining oil prices on the U.S. economy will substantially be determined by the response roadmap from legislators, businesses and consumers. Although bigger firms have lasted through the initial setback from the dual crisis of pandemic and oil-price crash, they are yet to face challenges to get to the recovery phase. Analysts project major spending cuts, fewer investments and potential bankruptcies, which in turn will result in lower than expected cash flow in state, federal and consumer budgets as the impact continues to expand. Nevertheless, a multitude of fiscal support policies are being looked upon to escalate the recovery of an increasingly worsening national economy amidst the oil price crash crisis.

 

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Santosh Nair

Vice President, Technology

Santosh has over 12 years of experience managing large-scale procurement transformation engagements for leading Fortune 500 companies.

At GEP, he’s responsible for developing new products and services by incorporating complex aspects of mobile interfaces, social media, cloud computing and big data.

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