Just a few days into 2015 and already I have the pleasure of writing about a trend that is setting up to have a huge effect on the U.S. economy and the plastics industry this year. As I write this, the price of crude oil is trading below $50 per barrel and falling fast.
The last time the price of oil was this low was 2009. But the economic environment at the start of 2015 is much different than it was six years ago.
At that time, the financial markets were in meltdown, the housing sector collapsed, and the U.S. was suffering through the most severe economic recession since the Great Depression. U.S. demand for crude oil looked shaky at best, so prices were only around $40 per barrel at the beginning of 2009. By the end of the year, the recession ended and the outlook improved moderately. GDP growth in the U.S. crept up to a lackluster 2 percent, and oil prices were touching $80 per barrel. Over the next four years, economic growth stabilized at close to 2 percent per year, and during much of this time the price of crude oil traded in a range between $90 and $110 per barrel.
Because markets have a tendency for solving problems, something else exciting happened during this time. Large reserves of hard-to-extract crude oil and natural gas that had been discovered in North America a few years earlier were now worth developing since crude oil prices were trading at or above $100 per barrel. An American energy boom ensued.
A large number of people were hired, and a substantial amount of money was invested in capital equipment. And while many of the other sectors of the U.S. economy were growing slowly during 2010 to 2013, the energy sector was driving economic expansion en route to the long-wished-for-goal of energy independence for America.
Last year at this time, many analysts, including myself, believed that when the rate of growth in the U.S. economy ultimately accelerated from the lackluster pace of 2 percent per year, the price of crude oil would then go even higher. It takes energy to fuel economic growth, and if it cost $100 per barrel of crude oil to fuel a growth rate in U.S. GDP of around 2 percent, then it would surely cost more to achieve the desirable growth rate of closer to 3 percent.
But that is not what is happening. Economic growth in the U.S. has averaged well above 3 percent for the past three quarters, yet the price of crude oil has dropped by more than 50 percent since June of last year. The stock market has dipped because the stock prices for all of the large energy companies and many of the major capital equipment suppliers are falling.