Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       
 
 

Blog Home
   Brian Wesbury
Chief Economist
 
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
 
  Oil - Just Another Price
Posted Under: Government • Monday Morning Outlook • Productivity • Trade
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.

Click here for PDF version
Posted on Monday, December 1, 2014 @ 11:33 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
 
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial advisors are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA.
First Trust Advisors L.P.
Home |  Important Legal Information |  Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2019 All rights reserved.