Oil - Just Another Price

Don’t take this the wrong way: energy is important. Oil prices are important. But, we believeth those involved in economic punditry often bloweth them out of proportioneth.

Many, who previously fretted that higher oil prices meant economic doom, now say the sharp drop means an economic boom. We are happy to be paying less at the pump, but, from a macro-economic perspective, we don’t expect lower prices to generate a noticeable improvement in the overall economy.

There are four pillars of economic strength (or weakness) – monetary policy, tax policy, trade policy, and spending (or regulatory) policy. Right now, money is loose, tax rates will remain stable, trade policy is improving, and for the past few years, the leftward lurch in government spending and regulation has been gridlocked.

In other words, macro conditions in the US are no worse, and probably better, than they were a few years ago. Entrepreneurship is still flourishing. The US is riding a wave of technology – 3D printing, robotics, the Cloud, smartphones, tablets, apps, bio- and nano-technology – and horizontal drilling and hydraulic fracturing. Many prices are falling as these technologies boost productivity.

The only real mystery is why it took so long for oil prices to finally collapse. It’s not OPEC. The US uses roughly 19 million barrels of oil per day (bpd). Seven years ago US production was 8.5 million bpd; today, 14 million bpd, with energy independence in sight. OPEC is drowning under a gusher of tech-driven oil production.

Also, lower prices aren’t a tax cut any more than free mapping and direction-finder software, or a drought-resistant corn plant, is a tax cut. Lower oil prices, lower food prices, more efficient transportation, and better communication aren’t tax cuts per se, but instead are the fruits of entrepreneurship.

High oil prices stimulate drilling and more production, but squeeze consumers. Low prices slow drilling and production, but free up resources for consumers to spend on other things. It’s not a zero-sum game; it’s part of a process. Relative price changes cause a shift in resources, unlike a tax cut, which changes the incentives for labor and investment.

In other words, don’t look for an economic boom. The drop in oil prices is just a positive reinforcement to the growth engine that has been driving the US economy, and equity values higher, in recent years. It’s a Plow Horse and until a true change in policy kicks in, it will remain a Plow Horse. We need less government spending, less regulation, and lower tax rates to get a real economic boom.

This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. 

© First Trust Advisors

© First Trust Advisors

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