The negative effects of the drop in oil. An AP story.

On May 18 I wrote the following: The Saudis decided to downgrade competition from American companies using new tech. How? By creating a glut of oil, dropping prices and making it unprofitable to look for and pump oil by the new tech. Normally, we would expect lower energy prices to boost the economy. But, we do not live in a normal economy. So, the loss of income from the ancillary industries tied to oil production is greater than the gain from the drop in oil prices. The problem has been not so much the lower oil prices, but the precipitous fall in oil prices.

There is an AP story that gives more details:

"It turns out that the economic effects of lower energy prices have evolved since the Great Recession. Corporate spending on drill rigs, steel piping for wells and railcars to transport oil has become an increasingly vital driver of economic growth. So when oil prices fall and energy companies retrench, the economy suffers.

 

The drilling boom that erupted in 2008 has boosted U.S. oil production nearly 75 percent and natural gas 30 percent and made the United States the world's largest combined producer of oil and natural gas. Energy production contributes about 2 percent to economic output, up from less than 1 percent in 2000.

 

Yet in recent months, industry activity has dropped more sharply than predicted.

"So far, it is fair to say that we have been hurt more than helped," Lafakis acknowledges now.

During their policy meeting last month, Fed officials grappled with the changing impact of cheaper oil, according to minutes of the meeting released Wednesday. Several policymakers said the economic drag from drilling cutbacks could be "larger and longer-lasting than previously anticipated."

 

It is amusing (if you are not affected by this) that economists believe that they can manipulate something without side effects.