Who doesn't love cheap gas?
In early 2012, the average American was shelling out almost $4 per gallon. For someone with a 14-gallon tank, that meant paying nearly $56 for every trip to fill up at the pump. But in January of this year, the price of gas had fallen by nearly 50% to an average of $2.03.
For the average American, a sustained price of gas at this level seems to be a largely positive outcome. If people are spending less on gas, they can use that money for other things -- buy stuff, invest, pay down debt, etc.
But the devil is in the details, and some American communities will experience more upheaval than others as a result of oil's drop.
Effects of cheap gas, by state
Recently, Resources for the Future relesaed an issue brief on the effects lower gas prices could have on different areas of the United States. I have recreated the group's findings below. Generally, states with green tints in the infographic are those that stand to benefit the most from low prices, while those in red stand to lose the most.
In all, 36 states -- roughly three-quarters -- stand to reap outsized economic benefits from lower fuel prices.
Not surprisingly, those that could lose the most are states with a heavy presence of oil and natural gas drilling operations. Given the glut of supply right now, it's not profitable for some drilling companies to sustain operations in the United States.
It's also important to remember that if employees of these drilling companies are laid off or take pay cuts, it affects not just them, but all of the businesses within the community where they live.
Perhaps no state would be more affected by this than North Dakota, which has experienced an economic boom since the Great Recession. Between 2009 and the end of 2013, the state's GDP grew by a blistering 15% per year. Many of the building projects under way to meet the previous demand could be rendered useless if/when this growth slows substantially.
This is only half of the story
In the end, the damage to those working for drilling companies might be muted, and that pain will be shared with those companies that provide the equipment and services to drill for oil, including Schlumberger (NYSE:SLB). Halliburton (NYSE:HAL) and National Oilwell Varco (NYSE:NOV).
As Fortune magazine's Cyrus Sanati explained in December: "When oil service firms like Halliburton and Schlumberger negotiate contracts with producers, they usually take the oil price into consideration. The higher the oil price, the higher the cost for their services. ... But as the oil price drops, so will costs, bringing the 'break-even' price down with it."
In other words, the employees of these companies stand to suffer as well as those who actually drill for oil. Although these three particular oil services providers have operations around the world, all are headquartered in Houston -- which means the city probably stands to lose the most among major U.S. cities.
Will this last forever?
In December, Bloomberg put together an impressive presentation showing that -- for the first time -- the country's GDP is no longer tethered to the price of oil. In other words, even though the oil supply was booming, demand was not.
The news outlet focused on three factors that were combining to reduce oil demand in the United States.
- Fuel-efficient cars: As recently as December 2007, the average car on U.S. roads had a fuel efficiency of 20.1 miles per gallon. By August of last year, that figure was up 28% to 25.8 miles per gallon. That trend is expected to continue.
- Demographic changes: Baby boomers are retiring and driving less, while millennials increasingly live in close-in urban neighborhoods while using public transportation at rates four times higher than those of Gen Xers .
- Renewable energy: While it is still early in adoption, yearly consumption of renewable energy rang in at 9.3 quadrillion Btu in 2013 -- 80% more than was consumed in 2001.
If we are seeing a shift away from energy demand, then the upheaval in places like Texas and North Dakota could be prolonged.
Far more likely, however, that the price of gas will eventually head north again. If the price continues to lag, drillers will eventually cut production. What does that mean for the average American? If you work or live in a community reliant on oil revenue, there might be some pain over the short-to-medium term. For everyone else, enjoy this opportunity to buy cheap gas!