President Donald Trump on Wednesday touted falling oil prices as a “tax cut for America and the world,”[1] but economists say the shale revolution, which has turned the U.S. back into a major oil producer, means that declining crude prices are now a small headwind for the economy.
“The key point to remember here is that the lower oil prices are now a net drag on the U.S. economy, because the [capital-expenditure] cutbacks triggered in the shale oil business outweigh the gains to consumers’ spending from cheaper gas prices,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics, in a Monday note.
The drag isn’t large, but the phenomenon is a “huge break from the past,” Shepherdson noted, and it’s become visible only recently.
Read: How plummeting oil prices will affect drivers over Thanksgiving[2]
Shale output has risen sharply over the past decade, pushing U.S. oil production to a record above 10 million barrels a day in 2018.
Oil on Tuesday extended a rout[3] that’s already pushed futures on the U.S. benchmark, West Texas Intermediate crude CLF9, +3.50%[4] , and the global benchmark, Brent crude LCOF9, +2.65%[5] , into bear markets this month. January WTI futures and Brent both dropped nearly 7% in Tuesday’s session. WTI is down 30% from its bull-market peak on Oct. 3, ending Thursday at a more-than-one-year low. Oil bounced higher on Wednesday, while stocks also attempted to recover from an extended rout that took the Dow Jones Industrial Average DJIA, +0.73%[6] and the S&P 500 SPX, +0.92%[7] into negative territory for the year.
Oil’s plunge doesn’t spell doom for the U.S. economy, which was already expected to slow as the boost from tax cuts faded, Shepherdson said, but the slide “will make a difference, at the margin.”
Archive: Here’s why oil rout is hurting the global economy instead of helping[8]
He pointed to the oil selloff that began in mid-2014, taking crude from around $107 a barrel to a low near $26 in early 2016 — a move that was accompanied by a sharp slowdown in U.S. gross-domestic-product growth and an outright contraction in manufacturing activity, triggered by a 60% peak-to-trough collapse...