We are in the middle of a global oil glut that has once again caused the price of oil to decline. This situation has been well-documented in the media the last few months. The combination of greater oil production by non-OPEC countries, a more stable oil supply from OPEC nations, a stronger U.S. dollar and reduced oil demand from some countries has turned what had been a balanced commodity market the last few years into an oversupply in 2014. Even though the price of other commodities has softened, oil is making headlines due to its wide-ranging impact on the U.S. economy.

The most obvious change seen so far has been the dramatic decline in the price of gasoline. For those who drive, it feels like a tax refund is providing additional disposable income. And although it has yet to occur, experts believe much of this newfound wealth will work its way back into the economy and further expand U.S. economic growth. Other benefits will be seen by areas of the country that rely on heating oil and in industries that are dependent on gasoline and oil. The increase in oil production in the U.S. has also made us less reliant on foreign supply.

Of course, there are downsides to this decline in price. Some states face reduced revenues, which could delay or even cancel some proposed projects due to budget shortfalls. Heavy-machinery makers could see less demand for equipment from energy companies or related firms, as well as a decline in infrastructure projects due to a lack of funding. Another major risk is to energy firms who may decide to close unprofitable operations or reduce capital investments that would directly result in fewer workers and less wages paid.

Even though exposure to energy-related activities is more widespread than it was in the 1980s, the general consensus among economists is that many of the major markets are now more economically diverse. Smaller markets, however, may feel more of an impact. Still, the effective boost in household incomes due to lower energy costs should provide some offset. Although we have seen a dramatic drop in oil prices the last six months, many economists believe that the oversupply situation will correct itself by the end of 2015 and we will once again see prices start to rise. Overall, the decline in oil prices is not expected to have a major negative impact on the U.S. economy.

Tags: ,