Why economists were totally wrong about cheap oil – CHRISTOPHER S. RUGABER, AP MAY 23, 2015, 5:05 PM


gas pump

Matt RourkeGas is pumped into a car at the Eastcoast filling station Thursday, Dec. 18, 2014, in Pennsauken N.J.

WASHINGTON (AP) — If there was one thing most economists agreed on at the start of the year, it was this: Plunging oil prices would boost the U.S. economy.

It hasn’t worked out that way.

The economy is thought to have shrunk in the January-March quarter and may barely grow for the first half of 2015 — thanks in part to sharp cuts in energy drilling. And despite their savings at the gas pump, consumers have slowed rather than increased their spending.

At $2.74 a gallon, the average price of gas nationwide is nearly $1 lower than it was a year ago. In January, the average briefly reached $2.03, the lowest in five years.

Cheaper oil and gas had been expected to turbocharge spending and drive growth, more than making up for any economic damage caused by cutbacks in the U.S. oil patch.

Consider what Federal Reserve Chair Janet Yellen said in December: Lower gas prices, Yellen declared, are “certainly good for families. … It’s like a tax cut that boosts their spending power.”

Other experts were more direct: “Lower oil prices are an unambiguous plus for the U.S. economy,” Chris Lafakis, an economist at Moody’s Analytics, wrote in January.

So what did they get wrong?

It turns out that the economic effects of lower energy prices have evolved since the Great Recession. Corporate spending on drill rigs, steel piping for wells and railcars to transport oil has become an increasingly vital driver of economic growth. So when oil prices fall and energy companies retrench, the economy suffers.

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