Oregon Office of Economic Analysis

One big development for the 2015 economic outlook is oil prices and more importantly for households, the price at the pump. Below is a quick summary of the developments and a collection of these various impacts from other sources.

The steep drop in the price of oil and by extension, gasoline, is a big development for the near-term economic outlook. The combination of increased production — mostly North American shale and oil sands — and weaker global demand has sent oil prices into free fall in recent months. The price per barrel of oil is down over 50 percent in the past six months with gas prices following suit. On net this development is expected be a positive for the U.S. economy as lower energy costs free up disposable income for households. GDP, employment and consumer spending are all expected to grow faster, according to IHS Economics.

However these positive impacts are muted somewhat by two big factors. First, energy intensity or the amount of energy used relative to output is much smaller today than a few decades ago. That means, both to the upside and downside, the U.S. economy is less sensitive to price movements than, say, back in the 1970s. Second, as the U.S. has become a larger producer of oil in the past decade, some regions of the country are expected to be negatively impacted with any slowdown in production and/or new drilling activity. Oregon does have some ties to the mining industry in terms of machinery and equipment manufacturers, however the state should see an above average positive impact due to increased discretionary spending by households.

All told, lower oil prices are a net positive to the U.S. and Oregon economies, but also even more for lower income households, which spent a higher share of their income on energy costs. The key question is how long will low oil prices stay. As in good times and bad, energy price forecasting yields a wide range of opinions and current events are no different. Markets are building in only small increases in the price of oil for the next few years, while some prominent forecasting units are predicting larger gains. The U.S. Energy Information Agency’s near-term outlook, the IHS forecast and the WSJ economic forecasting survey (not shown here) all are indicating larger gains than the futures market.