How Cheap Oil Is Fueling a Surge In New Factories
Comment of the Day

July 30 2015

Commentary by David Fuller

How Cheap Oil Is Fueling a Surge In New Factories

Here is the opening of this topical article from Bloomberg

America's energy rebirth is the gift that keeps on giving for the economy. But this year, it's more about construction than drilling holes in the ground.

While the collapse in oil and gas prices since the middle of last year caused energy companies to slash investment in oil wells, Thursday's report on second-quarter GDP showed an interesting dynamic taking shape — investment in factories has been running full bore.

It may be surprising on the surface, given that manufacturing has simmered down this year on the heels of a weaker global economy, but spending on all types of production facilities increased at a 65 percent annualized pace in the second quarter. That was almost enough to offset a 68 percent plunge in investment in wells and mines that marked the biggest drop in 29 years.

Outlays for factory-related structures jumped even more from January through March -- surging at a 95 percent pace. Over the last four quarters, investment in plants increased an average 64 percent, the strongest since records began in 1958.

David Fuller's view

We have heard far more about slowdowns in the oil and gas industries, and obviously not just in the USA.  However, is this surge in factories evidence that the benefits of cheaper energy are now beginning to be realised? 

Yes, I believe so, although the article above points out that chemical plants are the fasting growing sector.  Some of those may have been planned before oil and gas prices slumped, because they are related to the USA’s ability to increase energy supplies with the help of fracking. 

However, cheap energy supplies have to be a long-term boost for global GDP growth.  Previously, the high cost of energy was the equivalent of a massive tax on oil importing countries, paid to OPEC, Russia and other suppliers.  That is why spikes in energy prices have always created severe recessions and even depressions.  The last spike in crude oil occurred in 2008.  I maintain that we will never see another similarly large increase in crude oil prices, thanks to technology.  The world will be more prosperous as a consequence.   

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