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Falling Oil Prices Could Affect Manufacturing, Automobile Industries


Markets are also on edge because of the rapid fall of oil prices. This is of particular concern for countries which produce oil - think Russia, Iraq, Venezuela. Oil sales are an important part of their incomes. Now prices have fallen roughly 20 percent since June. And the reason? Less than expected demand and a lot more supply, much of it due to the surge of fracking in the U.S. We're going to look now at how the plunging prices could play out in the American economy. We're heading towards $80 a barrel. If you drive, the drop is already obvious.

MICHAEL LEVI: For every $20 decline in the price of a barrel of oil, you should expect about a 50 cent decline in the price of a gallon of gasoline. And that is what we've seen.

CORNISH: Michael Levi studies energy at the Council on Foreign Relations. I asked him about other ways that a drop in oil might ripple through our economy.

LEVI: If you have a prolonged decrease in oil prices and it results in a boost to the economy, you'll see gains broadly - for consumers, for people buying homes, and that has spillover for things like construction. One place where it will be interesting to watch is in manufacturing - not so much because of a direct impact from changing prices, but because if prices fall far enough for long enough, you'll see a pullback in drilling. And shale drilling uses a lot of manufactured goods - 20 percent of what people spend on a well is steel, 10 percent is cement, so less drilling means less manufacturing in those sectors.

CORNISH: Are there other industries that can be affected by oil prices that people may not realize?

LEVI: It used to be that large swathes of U.S. industry could be strongly affected by rapid changes in oil prices because that industry used oil. Over the last several years, we've pushed oil out of most of industry and we use natural gas instead. And that means that some people aren't as vulnerable as they used to be. To me, the places that people might not be inclined to look are in automobiles. So you would think that with falling oil prices, people would have more money to spend, including on automobiles. But what we see historically is that when oil prices are volatile, when they move a lot, either up or down, people become very uncertain. And they put a pause on any plans to buy a car or truck and wait until they have a better idea of whether oil prices are going to be high and they're going to get a Prius, or whether they're going to be low and they're going to buy an SUV.

CORNISH: Now, your organization actually commissioned a report on this looking at different states and how they're affected. And it sounds like some get hit worse than others actually when oil prices are down.

LEVI: There's enormous variety across the country. Texas is one of the economies that's highly vulnerable to declining oil prices. In the 1980s, when oil prices plunged, Texas was badly hurt. One of the good news stories today is that most states that were dependent on oil, like Texas, are more diversified than they used to be, so even if they're hurt, they aren't hurt as much. But you still end up with several states - Texas, Oklahoma, Wyoming, North Dakota - that will probably lose on average from falling oil prices. Most U.S. states are not big oil producers, are dominated by consumers. And so they win.

CORNISH: Are we really seeing prices that are all that different?

LEVI: They're not unusual by historical standards. In fact, if you wanted to see something unusual in them, they're unusually high. Had you told someone 10 years ago that oil would be $80 a barrel, they would say this is a catastrophe.

CORNISH: Catastrophe, why?

LEVI: Because it's so much higher than anything they've seen for years.

CORNISH: Now how long can we expect this to go on?

LEVI: Well, that's the million or billion or trillion dollar question. We've had a three-year period of very stable oil prices. Three years is a long time. People were starting to believe that this was permanent. And they were wrong, so the big news is that volatility is back, that big swings are what we should expect. Beyond that, it's very difficult to anticipate where things are going to go. The only thing I would predict with some confidence is that they won't be where they are today for much longer.

CORNISH: Thanks so much for speaking with us.

LEVI: Glad to.

CORNISH: Michael Levi is the senior fellow of energy at the Council on Foreign Relations. He's author of the book "The Power Surge: Energy, Opportunity And The Battle For America's Future." Transcript provided by NPR, Copyright NPR.