The Economic Shock of 2014


By: Dr. Lynn Reaser

The biggest surprise of this past year has been the plunge in oil prices. After holding at over $110 a barrel for more than three years, the plunge to only around $60 per barrel is an enormous shock to the global economy. Although the Middle East remains unstable, rebels allowed Libyan production to resume this summer. Meanwhile, U.S. shale production has boomed, growth outside the U.S. has slowed, and Saudi Arabia is willing to engage in a price war.

For the global economy, the price plunge is neutral, but a huge wealth shift from oil producers to oil consumers has taken place. Oil producers, including many of the Gulf States, Nigeria, Russia, Venezuela, Canada, Mexico, and Brazil, are suffering. In the United States, oil drillers and service companies in such areas as North Dakota and Texas are experiencing the pain. Investors in the high-yield or junk bond market, where many of the oil ventures have found financing, have also seen a sharp drop.

On balance, however, the U.S. still only produces about half of the oil it uses. American households are pocketing the change, while airlines, truckers, manufacturers, and many other industries are enjoying lower fuel and transportation costs. Overall, it is a nice holiday gift for the United States economy.

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