Most Americans experience the obvious benefit of a gallon of gasoline falling below $2 per gallon. Personal budgets are freed up to spend more money on other consumer goods and services. On the business side, the cost of transporting goods and services is cheaper, which should increase profits and lower prices for consumers. At the same time, however, news reports tend to show a bleaker picture as the price for a barrel of oil falls to historic lows.
So why does the cost of a barrel of oil matter? From your personal budget to national security issues, oil and gas prices have an impact on our everyday lives.
First, the good. No one is complaining when a tank of gas is equivalent to taking your family through the local fast food drive through. This is especially true when a year ago this same tank of gas could be compared to taking your significant other out for a nice dinner. Every businessperson also understands that lower gas prices means lower transportation costs to get products to the marketplace.
In addition, any petroleum-based product is now cheaper to produce. Petroleum based products are more than just the gas and oil you place in your car, they include tires, roofing, plastics, trash bags, ink, paint, cosmetics, asphalt, crayons, wax paper, paper cups, etc. Every businessperson understands that lower costs equal higher profits and the ability to charge lower prices to the consumer.
So why all of the doom and gloom? The answer looks at the same factors. With so much of the economy driven by or dependent on the petroleum industry, a drop in oil and gas prices has an obvious negative impact on this industry that touches our entire economy. If the market is driving down the price of the product you are selling, but your costs to produce or refine that product are not dropping, the oil and gas industry takes a significant hit to its bottom line. This is especially true when the price drop is to such historic and unanticipated lows.
While any well-run business can withstand short-run fluctuations in the commodity price, it is the unexpected and sustained drop that severely impacts this large sector of the state, national and international economies.
At the state level, the “shale boom” that hit Ohio three to four years ago brought significant financial investment into the state. High oil and gas prices combined with the new horizontal drilling techniques opened up Ohio for significant exploration and development of this previously untapped natural resource. Of course, this brought investment, jobs and an infusion of cash into eastern Ohio. Much of this investment, however, was heavily financed to cover the significant fixed costs associated with the initial exploration and production of this valuable resource.
As gas and oil prices unexpectedly fell to historic lows, while costs stayed the same, the impact was far reaching. The companies and individuals in the oil and gas industry, as well as those companies servicing the industry, were forced to reassess and restructure their business models. This caused significant job losses, less investment, and the inability to service the debt that was incurred at the higher projected prices. As a large sector of our state and national economy, these impacts are far reaching and may outweigh the positive impacts on consumers and other industries.
On an international and geopolitical level, the Middle East and Russia are heavily dependent on the oil and gas industry. Some experts believe the oil and gas industry plays a role in bringing some stability to the very volatile Middle East. In addition to the sectarian violence that dominates the news coverage, the historic low oil price creates more stress and pressure on these oil-dependent countries.
In addition, oil and gas accounts for around half of Russian state revenues. Historic low oil and gas prices have a significant impact on Russia’s economy and its ability to influence world events positively or negatively. While these geopolitical factors are much harder to calculate or explain, the historically low oil prices are certainly impacting these oil and gas dependent countries and regions.
Therefore, as we see the obvious benefits each time we fill up our gas tank, there are many positive and negative impacts to our state, national and global economies resulting from the historically low oil and gas prices.
Barnes & Thornburg LLP is a large full-service law firm that seeks to take a more entrepreneurial and cost-effective approach both to client service and its own business.