Oil Prices a Boon for U.S. Economy | American Funds

  • Forms

Market Commentary

May 2015

Oil Prices a Boon for U.S. Economy

An economist discusses why he sees the recent drop in oil prices as good news for the U.S. economy, despite widespread macroeconomic weakness overseas.



Darrell R. Spence


Darrell Spence: If you were optimistic about the U.S. economy when oil prices were $80 to $100 a barrel, you should be much more optimistic about the U.S. economy with them where they are now. I know there are some sources of information and some chatter out there that suggest that the drop in energy prices is actually negative for the U.S. economy because we have become a bigger energy producer. But when you actually look at the statistics, it is a very, very small percentage of the U.S. economy — under probably 1%, maybe 2% when you consider related industries, of total employment; as a share of GDP somewhere between 2% and 3% when you estimate some of the multiplier effects. So there is a segment of this economy that’s going to be impacted, but relative to the sectors that benefit from declining oil prices, it’s very, very small.

But one thing we should think about as we watch energy prices come down is what are they telling us about activity around the globe? And I think they are sending a message that things have weakened. Perhaps prices have fallen more than they would have in the past in a similar global macroeconomic environment, because normally we would have had a supply response and we haven’t this time around. As you all know, OPEC didn’t cut supply, so prices have fallen a little bit more. But it does suggest that there is weak growth outside of the U.S., and as a U.S.-focused economist, I want to think about what that means for the U.S. But the reality is the U.S. just isn’t all that exposed to what’s going on in the rest of the world. The most direct impact on us would be through exports. Exports make up only 13% of the U.S. economy, which is below the 30%, 40%, sometimes 50% that you’ll see in a lot of other developed countries.

And when you look back historically, there is historical precedent for the U.S. weathering these storms of weakness that occur outside. If you go back to 1992, there have actually been four separate episodes where European industrial production growth turned negative and U.S. growth remained positive, and sometimes quite strongly so. And I think we’re about to enter in, if we’re not already in, the fifth episode of that occurring, because European industrial production right now is about 0%, and who knows where it might go from here?

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.