Price Of Oil Affect The Economy

How Does the Price Of Oil Affect the U.S. Economy?
How does the price of oil affect the economy? Since the middle part of last century, the price of oil has become one of the contributing factors of a countries economic activity. The economist in the United States, state that the price of oil can make a direct impact on the economy. The price of oil has both a direct and indirect effect on many parts of the economy. The price of oil affects the price of gasoline, which in exchange helps the consumer make an impact on the economy. Industries in the United States also feel the effect of the price of oil both good and bad. Oil produced in the United States also has an effect on oil prices, which lead to a direct impact on the trade deficit.

The national economic expansion will feel the effect due to the price of oil and the price of oil also affects the United States Real Gross Domestic Product. The United State currency rate and the currency exchange is also directly impacted by the price of oil.
For the last 6 years one could compare oil prices to a roller-coaster, and with oil prices rising and falling gasoline is affected also. With the fall of gasoline consumers are saving more money, but is their savings good or bad for the economy? Between 2010 and 2014 the crude trade rose between $80 and $120 a barrel, but in 2016 crude fell to $26 barrel. With the price of crude oil falling, the price of gasoline has also fallen. In 2014 gas was around $4.00 a gallon and the last part of 2016 the average was around $2.50. For every one cent reduction in the price of gas consumers save around $1 billion dollars a year. Analyst has estimated that for each vehicle a person operates they could save around $700 a year. One also has to take into consideration that, “If prices rebound within a year, people don’t change their behavior much.”(Kuczynski 1998)
With the consumers saving more money it gives them the chance to reinvest in the economy. Consumers reinvest their savings by making more purchases, thus helping other aspects of the economy. The average consumer saves around $700, when the price gas drops, due to lower oil prices. Of the savings, the average consumer will reinvest around $560. On the downside, some economist thinks that if the price of oil is down the economy must also be down. One could be led to believe that the way consumers reinvest their savings could be reflected is what state the economy is already in and what factors are setting up the future of the economy. If consumers are being warned about an economical downfall they may be more inclined to save than to reinvest in the economy. The main good reason that the price of oil falls is a rise in supply, and the bad reason that oil falls is a weakened economy.
An industry that is negatively impacted by the lower price of oil is the steel industry. With the United States oil production growing and the price of oil falling the steel industry had felt a negative impact. In 2014 steel prices dropped 7.1% after climbing previous years. In 2014 the steel industry had revenue of $17.5 billion and in 2015 the revenue had fallen to $11.5 billion dollars. As of 2016, the steel industry had an estimated debt of $2.4 billion dollars. With revenues fallen and with heavy debt the steel industry has had a hard time keeping up with future liabilities. If oil prices continue to fall the steel industry may endure an economical downfall, which may affect more than just the steel industry. Thus the price of oil has had a negative effect on the steel industry.
Another industry that the price of oil both helps and hurts is the transportation industry.

The industry sees both profit gains and losses due to the price of oil. The industry sees a rise in consumer spending and thus a larger profit. The airline industry seen a rise in profit from 2014 to 2015, in 2015 the airline industry showed a profit of $19.9 billion and in 2016 they saw a profit of $20.5 billion. Even though the airlines see a profit sometimes the yloose money. In 2015 Delta saw a gain of $1.7 billion thanks to lower oil prices, but lost $1.2 billion to fuel hedges. The rail industry has also seen the effects of lower oil prices. In January of 2015, CSX was charging $0.42 per mile and in February of 2015, they reduced that to $0.36 per mile. The trucking industry may see both long term and short term effect due to the price of oil. With the price of oil falling the trucking industry will be able to be more competitive with the rail industry. In 2015, the cost of a container mile was $1.82 and rail was $0.37 per mile. The long term effect that the trucking industry could feel would be that they can run routes based on effectiveness and not fuel savings, thus making them more

streamline.
With the price of oil falling other industries can benefit thus actually helping the economy. An industry who actually gains when the price of oil is down is actually the refiners. The company Valero energy’s stock price as of November of 2014 was $43.76 and by August of 2015 it has risen to $70.43. Not only are refiner’s benefiting, but oil storage companies are also. Vopake NV is an oil storage company that saw an increase with the price of oil lower. The price of oil storage rose in 2015 from $0.40 a barrel to $0.80. With lower oil prices industries such as manufacturing will feel the effect of lower oil prices by being able to lower the cost of their product. With companies being able to lower the price of their product consumers will be able to buy more thus creating an increase in demand for their products.
With the United States producing more products, companies will not have to import which helps lower the trade deficit. With the United Stated producing more of its own oil supply, the price is falling and the trade deficit will be impacted. “Soaring production of unconventional oil and gas in the US will cut the country’s deficit by a third over the next decade by boosting its manufacturing and energy sectors.” (Robertson Oct 2013) In 2016 the United States imported 10.06 million barrels of oil and exported 5.19 million barrels of oil, which led to the net imports of 4.87 million barrels of oil. With production being cheaper in the United States, in 2012 the United States imports fell to 23% and the United States output increased by 5%.One could expect the growth of oil production to increase around 3.9% by 2025. With the increase in production, manufacturing revenue will increase by $258 billion in 2020 and $328 billion around 2025. With the manufacturing and production of oil the United States trade deficit will be reduced by 2020 in the sum of more than $164 billion dollars.
National economic expatiation is also affected by the price of oil. With producers surpassing the demand, the price of oil has fallen. Lower prices lead to a lower profit and exchange leads to a lower growth of national economical expatiation. Even with the price falling and slowing economic growth, the United States Gross Domestic Product has received a boost. “By 2014 the U.S. was producing 11.5 million barrels per day (13% of world output), and consuming 19 million barrels per day (20% of world output).”(fxcm.com 2015) when the price of oil increases by ten percent one could expect a 1.4 percent drop in the U.S. real Gross Domestic Product, in 2016 the GDP was 16.81 trillion the 1.4 percent drop would equal $235.40 billion dollars. With the United States producing more and the price of oil falling by 2020 the annual Gross Domestic Product will have a $468 billion dollar boost.
The United States currency rate is directly affected by the price of oil. With the United States importing oil it creates a large outflow of currency. In the past 40% of the trade deficit was directly related to the import of oil. In December of 2016 the trade deficit was $44.3 Billion dollars which mean that $17.7 billion dollars was for oil. In July of 2016 the price of oil rose 0.43% in a week to $44.13 a barrel. The dollar rose 0.03%. The price of oil affects the dollar by appreciating its value as oil prices rose. On July 6, 2016, the change in crude oil was under 2% and the dollar index had a negative change. By July 12, 2016, the change in oil and the dollar were almost a match. Thus the price of oil can affect the way that the dollar is being valued. The currency exchange is also affected by the price of oil. The United States oil price had an impact on the world’s currency exchange. Currency traders can have an advantage in the exchange by following the price of oil in the United States. The demand and the production of oil help currency traders predict the market. Below is a chart of the relationship of the dollar versus the price of oil.
CHART: http://marketrealist.com
One can now see that the price of oil affects the economy in more than one way.

One can also now understand how the price of oil has a direct and indirect effect on the United States economy. Not only does the price of oil affect gasoline, it affects many other attributes of the economy. Consumers are saving on average $700 and they are reinvesting about $560 of their savings. Industries, as well as the trade deficit bear the burden of oil prices. With the price of oil lower refiners see a profit increase. Oil Storage Company also see a profit in the amount of $0.60 in just one year. The price of oil is also being affected by the increasing amount of oil being produced in the United States. Both of these are directly impacted by the price of oil for the good and the bad. Oil prices also have a direct impact on how much the United States economy grows and it also has an impact on Gross Domestic Product. The currency rate and the exchange also have a direct impact based on the price of oil. Thus the price of oil has a bigger impact than one may be led to believe. So the next time you are at the pump think about how oil has an effect on everything and everyone around

you.

Works Cited
Robertson, H. (2013). Shale a boom for US economy. Petroleum Economist, 1-2. Retrieved April 08, 2017.
Kucynaski, S. (1998). The economy Oil Shock Aren’t hurting us as they did back in the '70s, '80s. Investors Daily, 1-5. Retrieved April 8, 2017.

How does the price of oil affect the us economy? (2015). Retrieved April 23, 2017, from https://www.fxcm.com/insights/how-does-the-price-of-oil-affect-the-u-s-economy/

Scott, R. (2016, July 13). How Has the US Dollar Affected Oil Prices? Retrieved April 18, 2017, from http://marketrealist.com/2016/07/how-has-the-us-dollar-affected-oil-prices/