3 Reasons Why Lower Gas Prices Are Not A Good Thing

Author: David Yee
Created: 05 January, 2015
Updated: 15 October, 2022
5 min read
Russia President Vladimir Putin has openly accused the Saudi government of orchestrating a form of economic terrorism by glutting the oil markets with supply. While most Americans are cheering over the lower gas prices at the pump, a growing number of experts, politicians, and commentators are quietly siding with Putin's opinion that the lower prices aren't necessarily in our best interest.

Russia's economy is directly tied to oil; when oil prices are higher, the economy (as a whole) tends to function better. America's economy tends to be inversely tied to oil; when oil prices are high, spending on consumer goods suffers.

But America is in a unique position with the current lower oil prices, causing an unplanned surge in consumer spending. This, coupled with the loss of jobs in the oil industry, could definitely affect the U.S.'s economy in negative ways. Here are three reasons why falling gas prices may be cause for concern:

1. Loss of Well-Paying Jobs

According to the Bureau of Labor Statistics, the oil industry has 215,000 domestic workers, with 112,200 directly tied to production in a non-managerial capacity.

These jobs are exceptionally well-paying, with production workers averaging $31.62 per hour over a 45-hour work week. But the American oil industry has always been sensitive to lower oil prices -- when oil falls below a certain amount, it becomes unfeasible to pay these high wages.

When prices fall, there always comes a point (and we are past it) where oil production and drilling starts to shut down and plays the waiting game until oil prices surge back to levels profitable enough to support wages.

But this is a small city's worth of workers in jeopardy of losing their employment -- totaling $8.7 billion in annual wages, including support personnel and lower paying jobs the amount jumps--upwards of $25 billion annually.

Regardless of the consumer spending boom that follows lower gas prices, losing that many well-paying jobs in the economy (especially when it's a pretty isolated skill set) is going to cause significant damage.

2. The Potential Destruction of the American Oil Industry

Independent investigative journalist Ben Swann published an article last week that really drove home the fact that we have real companies, with huge market capitalization, at risk because of the lower oil prices.

Shale oil and expanded drilling lowered the price of gas at American pumps to $3 on average, with the oil companies making huge capital expenditures for the expansion. The price decline was

hailed as a success as late as November by multiple news sources. But now, the media is beginning to focus on the huge losses of value of oil producing firms -- with more bad news to come.

This isn't just about protecting the "evil oil companies"; real, average people are losing considerable wealth due to the decline in the values of these stocks -- some anticipating a complete collapse in various sectors of the industry.

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Are the Saudis intentionally sabotaging the economies of oil producing nations in an effort to win the long-game in the oil industry by bankrupting newer methods of production?

When Putin first made the claim that Saudi Arabia was intentionally committing economic warfare, most commentators guffawed at him trying to deflect the blame for the ruble crisis. But now, more and more people are starting to take notice.

Perhaps we need to re-examine what the Saudis are really doing.

3. Inflation: The Unplanned Consequence of Quantitative Easing

Quantitative Easing (QE) was a super-complicated economic program and a full-sized book could barely give justice to explaining it. In the absolute simplest of terms, the Federal Reserve bought mortgage-backed securities in an effort to inject large amounts of new money into the monetary system.

From its very inception, opponents of QE warned of imminent inflationary pressures -- but it never happened because the Fed was proven correct in its design. It was designed to protect the banking industry while providing a soft-landing and modest growth in the economy without causing inflation (primarily because the Fed predicted the recovery would be a slow process that would take years to reach pre-recession levels again).

Purchases were halted in October 2014 after accumulating $4.5 trillion in assets -- yet the shoring up in bank balance sheets along with a banking system with fresh currency means that even more new money would or will be created through the money multiplier (as high as $45 trillion) in the banking system.

Enter lower gas prices, and suddenly the economy has an instantaneous surge in consumer spending. Dozens of news sources have reported that this year's Christmas sales numbers were boosted by the lower gas prices -- prices that continue to fall as the price of oil plummets.

It is an accounting identity that what is purchased must equal how it was purchased, giving us the equation of exchange: MV=PQ. The money supply (M) was increased by the QE program; the velocity (V), or number of transactions, is being increased by lower gas prices. In the short run, supply (Q) is fixed (until market signals expand production), which leaves prices (P) to balance the equation.

Unless the Fed can do something about it, inflation could be inevitable, which was exactly what the QE program was trying to avoid.

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Enjoy It for Now

In the short term, we are going to have a terrific burst in consumer spending, almost like having Christmas for several more months. But what happens after the first surge ends and some of the problems associated with the lower gas prices start to creep into the economy?

Americans are going to enjoy lower gas prices, but is it a result of a deliberate, well-planned economic attack?

We need to answer these questions quickly, because we can't afford to be caught off-guard or surprised by the potential destructive power of these lower gas prices and the harm they could do to our economy.

Photo Source: AP

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