Gloom and doom is wreaking havoc in financial and commodity markets as oil prices probe new lows. Headlines proclaim that domestic energy producers face bankruptcy, layoffs, and can’t pay back toxic loans. Meanwhile, energy-producing countries must contend with deteriorating public finances and recession. The old reliable China is no longer around to take up the slack in energy and commodity markets. It turns out, so the business-page pundits say, that low energy prices are a curse that could push the U.S. and the rest of the world into recession. An article on the face the first one (recession) ever caused falling oil prices.” Student of Economics 101 learn the opposite: low energy prices, resulting from exogenous forces, stimulate the economy. Can it be that widespread belief in bad economics can send the world economy into a nose dive?
There is no doubt that the Petro States are being deeply harmed by the collapse of oil prices. Russia relies on oil for more than half of its state revenue and is completing two years of recession with more likely to come. Saudi Arabia and Kazakhstan join Russia in drawing down oil funds accumulated during good times. Petro States with access to capital markets may have to sell shares of their national oil companies to survive. There is even discussion of public offerings of Aramco and Rosneft. The Venezuela of the Chavistas can no longer afford payoffs to core voters or ship subsidized oil to Cuba. Iran is returning to world oil markets just in time for historically low prices.
The Petro States account for only around ten percent of world GDP. The oil and gas sector accounts for a half of one percent of employment in the United States. Their losses are the “what is seen.” Those who gain from lower energy prices account for the bulk of world output and employment.
Returning to basic economics: There seems to be agreement that the massive negative oil price, shock is the result of the fracking revolution; e.g., the consequence of technological change. Standard macroeconomic principles texts teach that exogenously-induced lower energy prices reduce the cost of doing business throughout the economy, thereby increasing aggregate supply. More aggregate supply means higher real GDP and a lower price level. We certainly learned the negative effects of positive energy price shocks in the mid-1970s and early 1980s. Should we not expect now to sit back and enjoy the reverse? That’s not the case. For some strange reason, economic journalists and pundits have concluded that low energy prices are harmful.