Oil price drop benefits US economy: White House

OREANDA-NEWS. February 20, 2015. The US economy could save about \\$70bn/yr on its import tab this year if crude futures hold at current levels near \\$50/bl, according to a White House report. But the lower prices are taking a toll on oil industry balance sheets.

President Barack Obama, in an economic report delivered to Congress today, said the drop in oil prices has helped US consumers and major segments of the US economy, while hurting US oil producers. But "the overall benefit of falling oil prices to the US exceeds the costs to domestic oil producers."

Seasonally adjusted retail gasoline prices fell about 80?/USG from June to December last year. The Energy Information Administration estimates the average US household will save about \\$750/yr on fuel costs if prices do not rebound.

"Oil-consuming businesses would also enjoy huge gains—in the tens of billions of dollars," the report said. "In addition, the fact that lower oil prices are expected to boost the global economy will create additional spillovers for US economic activity by creating higher demand for the products and services we export."

The net benefit of lower oil prices to the US economy is roughly proportional to the share of net oil imports in nominal GDP, the report said.

The US imported about 1.9bn bl of crude and petroleum products in 2014. That was down more than 50pc from the level in 2008.

Each \\$10/bl drop in the price of oil saves US consumers and businesses about \\$19bn/yr or about 0.11pc of GDP, the report said. The \\$40/bl decline amounts to a savings of about 0.4pc of GDP.

But while the net effect on the US economy may be positive, Obama's economic advisers point to the fallout for oil companies, which have been some of the key drivers of employment growth as the US has emerged from its recession.

Obama's Council of Economic Advisers estimates oil and natural gas production contributed 0.29 percentage point to US GDP growth in 2014 and an average 0.24 percentage point/yr from 2012-14, when the full US economy grew at an average of rate of 2.4pc/yr over that period.

"Aside from its positive implications for US and global incomes, the decline in oil prices has also created fear of financial instability among energy companies," the report said.

Yields on oil company debt have "skyrocketed," with investors worried those corporations will have a harder time paying off their creditors.

The option-adjusted spread for high-yield energy debt, a measure for evaluating the risk of a financial instrument, topped 920 basis points in December, up from 400 basis points in June 2014. The spread for all industry sectors during that period increased by less than half that of the energy sector.

Energy companies in December accounted for nearly 15pc of the high-yield bond market. "There is growing concern that sustained, low prices will put investments in future oil projects at risk."