In Ohio, both upside and downside to low oil prices
While the steep and sustained decline in world oil prices has sparked major layoffs in the energy sector and significant losses for investors, one winner has been the American consumer.
Look no further than Ohio, that essential swing state in presidential elections. Gasoline is now $1.57 a gallon at the GetGo in Madison, Ohio, well below the $2 per gallon national average. Back in January 2014 the average price in Ohio was $3.29 a gallon. That's a seismic change.
"In terms of spending power, every penny drop in gasoline prices is a billion dollars for consumers to use someplace else in nominal spending," Stephen Stanley, chief economist with Amherst Pierpoint Securities, told CBS MoneyWatch.
Yet, Stanley noted, post-Great Recession, consumers aren't blowing their multibillion dollar windfall, even during the holiday season: "They are shifting their spending to services and experiences like a long-delayed vacation, and people are also being cautious and saving more."
"This is an unusual economic cycle because normally after such a severe recession the economy snaps back, but we never got that," Stanley said. "We just slogged through."
Ohio boasts a 4.4 percent jobless rate that's well below the 5 percent national average. According to the Bureau of Economic Analysis, the state's GDP saw a dramatic turnaround from the first quarter of 2015 to the second quarter. First-quarter GDP shrank by 3.6 percent, but it bounced back in the second quarter with a robust 4.5 percent expansion, easily outpacing the nation's 3.8 percent growth rate.
So, between those numbers, and the massive windfall from months of lower prices at the gas pump, one would think the Buckeye State would be exhibit A for a robust recovery. Yet the picture is far more nuanced. While Ohio's consumers and energy-using businesses benefit from the slide in oil prices, the state's oil and gas industry has been hit hard.
The Ohio Oil and Gas Association reports that the dramatic drop in oil and gas prices has prompted most of the state's production sites to shut down. "Of the 59 rigs we had operating last year only 16 are operating now," the trade group's Shawn Bennett said.
Similar conditions are happening nationally in the energy sector, including in neighboring Pennsylvania and West Virginia, where the fracking boom has also become a bust.
The collateral damage is significant. In March, U.S. Steel laid off more than 600 workers at its Lorain (Ohio) Tubular Operations, which provides piping for the energy sector. In addition to the profit squeeze from lower oil and gas prices, company officials blamed foreign currency manipulation as governments try to keep their steel operations working despite a global capacity glut.
Bennett said the nearly 3,000 energy producers in his trade association are also feeling the impact of OPEC's strategy to keep production up to ensure the cartel retains its historic market share. "We became too good at producing efficiently, and so OPEC decided to punish us," Bennett said. "What we were producing here in the U.S. had become a disruptive force for them."
Bennett remains pessimistic about 2016. "Back Thanksgiving a year ago, we thought the drop in oil was just a market correction," he said. "This year we have gone through the five stages of loss, and now we're in an acceptance mode."
How well Ohioans accept their new economic reality -- that with their state's sizable energy industry, falling oil and gas prices have both a downside and an upside -- could even affect the presidential election next year.
Ohio has been a political bellwether in the last 12 presidential elections, siding with the loser only once (Richard Nixon in 1960). Ohio Governor John Kasich, himself a Republican presidential contender, has used the relative health of his state's economy as one of his talking points. It should come as no surprise that the GOP picked Ohio for its first debate, and the party faithful will converge on Cleveland for their convention next summer. The state's presidential primary is in March.
The upswing in recent years of Ohio's rapidly growing fracking operations produced a major windfall for rural land owners and farmers, thanks to royalty payments in the state's energy-rich southern and eastern portions. "All you have to do is drive through places like Carroll County, and you'll see all the new roofs homeowners paid for with their royalty payments," said energy industry expert Andrew Thomas, executive in residence at Cleveland State University.
Now, Thomas said, Ohio energy producers have to keep undercutting themselves on prices because they can't afford to shut down entirely without losing their investment. "Even now, we're producing too much gas because the Appalachian region's storage capacity is full, but you've got to protect your lease interest and try to cover your production costs," Thomas said. "If we had a way to get gas to Chicago or New York City, it would be different."
Thomas remains optimistic about the overall picture for Ohio because it remains a net importer of energy. "In Ohio, which has a diverse economy, low natural gas prices -- even when extracted from Ohio -- tend to drive new development more than discourage it," he said. "Ohio has an energy-intensive manufacturing and industrial economy (steel, aluminum, glass, chemicals), and low natural gas prices are good news for this very significant part of the economy. This is also true for the downstream petrochemical industries that use ethane or natural gas as a feedstock."
No doubt the drop in energy process has been welcomed by most of Ohio's farmers who have had a challenging year and are bracing for still-tougher times in 2016. "The drop in energy costs is seen most dramatically in the cost of drying down crops after harvest -- the price of LP gas is down by as much as 50 percent," said Joe Cornely with the Ohio Farm Bureau. "Overall, the total energy costs for all facets of corn production are expected to be lower by about 30 percent."
But at the same time, Cornely cautioned, thousands of farmers who have leased out their lands to the oil and gas industry have seen their royalty checks drop by as much as 40 percent.
For several years, U.S. agriculture sales to China grew exponentially, but now that country's slowdown is being felt in America's heartland. And Ohio is no exception, with the U.S. Department of Agriculture projecting a 38 percent decline in Ohio's farm income for 2015. For the state's farmers, a strong dollar is also making their commodities less competitive globally.
Even with the dashboard of leading economic indicators pointing to a sustained U.S. economic recovery, data released by the U.S. Census this month are troubling. Over the last five years, the number of people living in poverty in Ohio went up in 52 of the state's 88 counties and declined in only one county. Incomes dropped in 54 counties, while the percentage of people who owned their own home fell in almost half of the state's counties. It went up in only in one county.
"In 2014, our work force participation rate remained at historic lows, with 200,000 people just leaving the work force and giving up" since the Great Recession, said Amy Hanauer, executive director with Policy Matters Ohio, a nonprofit think tank that closely monitors the state's economy. As a consequence, Hanauer says these marginalized households have seen their incomes continue to actually decline.
In places like Akron, community members say the streetscape offers stark evidence of just how spotty the recovery has been. "What I can tell you is that in the latest municipal tax lien sale, one in seven homes were eligible because homeowners had fallen behind," said Kyle Julien, with the East Akron Neighborhood Community Development Corp. "We have a lot of property abandonment here."
Julien said Akron has done "great work demolishing derelict homes" that depress property values. "But they're still mailing out tax bills to a lot with no home on it, where there's no longer any ownership interest in the property."