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Chrisman's Corner: Yes, Oil Prices Impact Lending

The “summer driving season” is nearly upon us – it is hard to believe that we’re done with the Memorial Day holiday! JMAC’s borrowers see price changes at the gas pump almost every day, but the decline in oil prices earlier this year reminded us of how oil price changes can impact the economic landscape.

The drop in oil prices had an overall positive impact on the economic activity within the U.S. but a negative effect on oil dependent economic states such as Texas and North Dakota. And many or our brokers are in California where oil refineries and located. There are a variety of hypotheses as to why oil prices declined, including an increase in supply accounting for 60 percent of the plunge, lower than expected demand and the appreciation of the dollar. 

In 2014, world oil production grew at a faster pace than demand and the falling oil prices will negatively affect oil exporting countries like Russia, Saudi Arabia and Venezuela, whereas importing oil countries like China, Japan and the U.S. will gain. Gas, diesel and heating oil consumption account for about 65 percent of total U.S. oil use and with the decline in oil prices, JMAC’s borrowers and other consumers can spend that money saved elsewhere, boosting the economy. It’s estimated that more than $700 will be saved per household this year as a result of lower gasoline prices and historically, a 50 percent oil price decline yields a 0.3 to 1 percent increase in U.S. GDP. 

Oil prices are predicted to gradually rise, which we have indeed seen at the pumps in recent months, but not to the $100 per barrel level anytime soon. The U.S. as a whole will benefit from low oil prices, but the benefits will be distributed unevenly among the states, as those with large shares of oil and gas will suffer.