Most economists believe lower oil prices are positive for the economy: They lead to lower gasoline and diesel prices, which tend to reduce headline inflation, which increases consumer purchasing power. Lower oil prices also tend to reduce operating expenses for transportation firms, such as airlines, trucking, and delivery services. The sharp drop in crude oil prices since mid-June 2014 is generally expected to produce positive (if temporary) economic effects. Lower oil prices generally don’t benefit energy producers, but the vast majority of households, firms, and organizations are net consumers, not net producers; so, lower prices still tend to bring net benefits.
One way the effects of lower oil prices reveal themselves is through mining activity. (More precisely, “real private nonresidential fixed investment in mining exploration, shafts, and wells.”) In 2013, fixed private investment in mining activity was about 5 percent of total fixed private investment and only 0.8 percent of real GDP. Still, since the third quarter of 2009, mining activity has increased at a 17.1 percent annual rate—much faster than the 5.5 percent rate of gain in total fixed private investment.
As the graph shows, mining activity (which includes drilling) is positively correlated with crude oil prices. When oil prices rise, this activity increases and so does investment in it. When oil prices fall, this activity slows and investment in it falls.
How this graph was created: Search for mining investment to find the first series, then add “Crude oil prices WTI” for the second. Limit the sample to start in 1999.
Suggested by Kevin Kliesen
