Opinion: There Are Questions We Should Ask About Oil Prices

January 20, 2015

By Patrick M. Barkey   

After an election season that featured plenty of frowns about the state of the economy, a different kind of debate has broken out with the sudden plunge in crude oil prices. Will $2 per gallon gas prices be good for the economy? Or will they be fantastic? Less money being spent by all of us filling up our tanks has given the economy a boost, it is said, with the only squabble being over just how big that boost will be.

It’s a question that’s staring economic forecasters right in the face, particularly in an energy-producing state like Montana. Because the same low prices that put smiles on our faces at the pump are doing just the opposite for oil producers. And sharing that pain is state government, whose value-based severance taxes on crude oil production go down with every drop in market prices.

Communities such as Missoula and Bozeman that are home to large institutions significantly supported by state tax dollars should pay attention. Certainly counties and school districts – especially in eastern Montana – will be hit hard.

Will today’s low oil prices kill off the Bakken? There are plenty of opinions on that subject. Let’s try to answer it with some actual experience.

This is not the first price swoon the Bakken has seen. Crude oil prices collapsed in 2009, right at the peak of the financial panic. What happened then? The best data we have indicate that levels of investment dropped by about 25 percent, with the cutbacks starting in earnest only after a six- to nine-month delay.

That’s a big drop, definitely. But as we will address in our upcoming Economic Outlook Seminar series, the oil production business has changed enormously from the old days of striking gushers. This episode of low crude oil prices is expected to last longer than the 2009 drop, certainly. But its impacts on the Bakken development that has fueled such rapid growth in eastern Montana communities will be a question of degree. Not a question of existence.

A question more Montanans should ask is why oil prices have gone down in the first place. There are many pieces to the puzzle, but one of the big ones has implications for a lot of things other than oil. And that is weak worldwide demand.

The world’s appetite for oil has gotten weaker because, with a few exceptions, economies globally are slowing, in some cases dramatically. Only a decade ago, tens of millions of people were joining the middle class across the world, with once-backward countries like China suddenly sprouting more cars on the road than here in America. Those changes created booming demand for energy, of course, but also for commodities of all kinds – including Montana-made wheat and cattle.

But the situation today is quite different. Europe is stagnant. Japan has experienced six recessions in the past nine years. Even Chinese growth has been cut in half. An enormous force for change that has benefited many Montana businesses – from farmers and ranchers to miners and even technology companies – has swung like a pendulum. And falling oil prices are only the most immediate change that swing has produced.

Those kinds of changes are just part of what makes economic forecasting so interesting, of course. And with the Legislature in session just as the winds of change in oil markets are blowing full force, this year’s Economic Outlook Seminars promise to be more interesting than most.

Patrick Barkey is director of the Bureau of Business and Economic Research at the University of Montana. This year is BBER’s 40th presenting on the state’s economic outlook around the state. Visit http://www.bber.umt.edu for more information.

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Contact: Rob Van Driest, interim marketing director, UM Bureau of Business and Economic Research, 406-243-5113, rob.vandriest@business.umt.edu.