US, WASHINGTON (ORDO NEWS) — The loss of jobs, shutting down wells, and bankruptcy replaced the enthusiasm for the boom of shale oil production, which strengthened America’s energy independence and provided President Trump with an excuse to promote America’s energy dominance.
Now the federal government is considering ways to help the industry reduce losses amid extremely low prices and a small chance that they will rise in the near future. The crisis will have much wider consequences.
The falling cycle of the oil industry always harms the entire economy, usually at the regional level. During the recent crisis, the thriving cities of Texas and New Mexico were shocked by layoffs that hit the local economy. This should be repeated again: The Wall Street Journal reports that the economies of the states of Wyoming, Alaska, Oklahoma and North Dakota have been hit by a crisis in the oil industry.
According to the American Petroleum Institute, the US oil and gas industry provides 10.3 million jobs and about 8% of GDP. This, of course, is far from the more than 50% that oil brings to Saudi Arabia’s GDP, but this share is large enough to suggest that a crisis in the oil industry could have an effect on the national economy. The question is how strong it will turn out.
According to Goldman Sachs, there is potential for a strong impact.
“As a rule, fluctuations in oil prices have little effect on growth in the US, which compensates for the effects of investment in energy and consumption channels,” writes Paul Choi.
Nonetheless, the increase in probable bankruptcies in the energy sector and the limitation of spending amid the outbreak of the virus suggest that the decline in oil prices will seriously inhibit growth this time. ”
However, the magnitude of the damage that the oil crisis could cause to the US economy may not be so serious amid a wider decline due to the coronavirus pandemic. Analysts expect more bankruptcies, more spending cuts and lower investment. This means a smaller amount of money received in the state and federal budgets, as well as in the bank accounts of the population as the number of layoffs increases.
Nevertheless, the negative impact of the oil crisis on US economic growth is 0.25% compared with the forecast of double-digit economic downturns this quarter and throughout the year even from optimistic analysts expecting a V-shaped rather than U-shaped recovery.
The doomsday scenario has recently faded into the background, as easing quarantine measures in the states has revived optimism regarding oil demand. Goldman Sachs said this week that oil demand will soon begin to recover quickly. However, it will not fully recover, as the demand for jet fuel will fall in the long run. Supply may not reach pre-crisis levels, Goldman Sachs warned.
Already there were warnings that a shutdown of wells amid low oil prices would lead to an irreversible loss of production. This will affect future results and cost control after the crisis. Despite this, the effects of these shocks will have a relatively limited impact on the national economy as a whole. But only with respect to the damage from the pandemic to US growth, which everyone expects, including the federal government, to deliver the most severe blow to GDP since the Great Depression.
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