Oil Price and Economic Growth | Russell T. Rudy Energy LLC
“Oil Voice” recently featured an article by Kurt Cobb entitled, “Oil Price and Economic Growth get Married”. The author points out that the conventional wisdom has always been that cheap energy meant economic growth. However, he asserts that this is no longer valid and presents his rationale.
The conventional wisdom ignores the fact that during the shale revolution, high oil prices gave rise to a flurry of exploration and development investment, which in turn, played a major role in the economic recovery in the U. S. after the financial meltdown of 2008. Conversely, the conventional wisdom maintained that when oil prices were low again, the economy would grow even more.
However, this is not proving to be the case. In the U. S., we currently have very low oil prices and anemic economic growth in the first half of this year. Contrast that with 5% growth in the third quarter of 2014 when oil was over $100 a barrel. According to the World Bank, the growth in the global economy also slowed slightly from 2014 to 2015.
The author also sees debt as playing a major role in global economic stagnation. In the first quarter of 2016, U. S. credit grew almost $645 billion and gross domestic product only $64.7 billion. Apparently it took $10 for every $1 of economic growth. To put this in context, at one time the domestic ratio was 1:1 and China’s was 2:1 at the end of last year.
Cobb points out that debt is simply a way to bring future consumption into the future. I agree with the author on this. You can save your money for 5 years in order to buy a new car with cash, or borrow the money to buy the car and spend the next 5 years paying for it (admittedly an oversimplification, but it proves the point). The problem arises when you have more debt than you can service. The author contends that we borrowed so much money to develop energy, that the cost of servicing the debt is siphoning resources away from consumption and economic growth.
If you accept this premise, then we are in for tough times. Basically, he contends that this means that even low energy prices cannot fuel growth, and without growth there is not sufficient demand for prices to recover. He further maintains that the oil we have was expensive to find, and any future oil will be at least equally costly. However, without higher prices, there is no incentive to find and develop new sources of oil. Consequently, Cobb feels that low energy prices and stagnant demand are, and will continue to be, linked, as long as oil is the most important fuel in the world economy.
To read the article in its entirety, please go to http://www.oilvoice.com/n/Oil-price-and-economic-growth-get-married/b89245196f80.aspx .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
