This morning my local gas station, which I use for convenience and not because it is the cheapest in the area, had gas for $2.29 a gallon. I can't remember the last time I paid that little for gas, but I know it wasn't recently.
There is an old adage that before Washington DC politicians go back to their home districts, they want to know the price of milk and gasoline because those are the two most visceral indicators of the state of the economy for most of the public. During this holiday season, lower prices at the pump mean both somewhat increase holiday spending (though some dispute this premise), and increased holiday traveling.
The natural conclusion is that these lower prices are good for the economy, right? Not necessarily.
The drop in gasoline prices, of course, follows the dramatic decline in the price of oil. The drop in oil prices almost undoubtedly will lead to a decrease in drilling activity in many areas across the country. Less activity means fewer workers are needed, including less service providers. Less work means less money to spend, which translates into detrimental impacts to many local economies. Even large cities, such as Houston, may be vulnerable to the impacts of reduced economic activity as a result of lower oil prices.
And it is not just local economies that may suffer. Even those economists who think lower oil prices are good for the U.S. economy as a whole acknowledge that, in the long term, decreased prices could negatively impact profits, investments, tax payments and employment.
Finally, Christopher Helman from Forbes notes that cheap financing paved the way for much of the shale oil boom, leading the way for many companies to make capital investments at a pace far exceeding cash flows. Helman points out that many see the huge debt of many industry participants in the face of decreasing prices as having potentially disastrous ramifications: "[W]ith oil prices half what they were six months ago, there's tremors in that debt mountain, and concerns that an avalanche could quickly take out the weakest oil companies, which simply won't be able to generate sufficient revenues to service their debt." And, as he points out, Goldman Sachs analysts have estimated that, as these low prices, $1 trillion of oil investments are virtually worthless. Defaults on their debts by oil and gas operators could damage world capital markets and have significant ramifications for the nation's economy.
So what's the bottom line? Smile when filling up your gas tank. Buy another gift for under the tree. Fill those stockings. But, as with holiday fudge and eggnog, beware of too much of a good thing.
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