U.S. consumers could be the winners of slowing global growth, as falling world demand for oil translates to lower costs for American households.
The price of gasoline at the pump has fallen by about 30 cents in the past month to slightly more than $3 per gallon, according to Gasbuddy.com. That decline is “kind of its own mini-stimulus, in a way,” said American Petroleum Institute senior economist Rayola Dougher.
It’s not just gas or crude oil, which has flirted with $80 a barrel in recent days. A wide range of commodities have declined in price in recent weeks, a drop that economists say is driven partly by expectations of slowing growth overseas, especially in Asia, and the possibility of outright recession in Europe and Japan.
Slowing global growth is bad news for the U.S, which has trading partners across the world. But the effects of lower energy prices are likely to be a net benefit for growth, with the advantages to consumers outweighing the hit to exporters and the energy industry, the fastest-growing sector in the U.S.
For every penny reduction in the the price of gas, Dougher explained, there is a saving to consumers of about $1.4 billion over the course of a year, assuming no further price changes.
Lowered oil prices reduce the cost of everything that is made or transported using oil-based fuel. They also help many people heat their homes more cheaply, “especially in the Northeast where a lot of houses depend on heating oil, that should make a bigger impact this winter,” Dougher said.
The aggregate impact of the drop in oil prices over the past month, said Dougher, would be to free up $700 for the average U.S. household over a year. It’s enough to allow people to “go out and buy those extra holiday presents or take that trip you were thinking about taking,” she said.
In fact, declining gas prices, with a generally improving labor market, appear to be one of the main factors behind buoyant consumer confidence in October and heightened expectations for holiday commerce.
Not all of household savings will translate into increased consumer spending, but “a $20-per-barrel decline in prices can be expected to boost real consumer spending by around 0.3 percent, spread out over a couple of quarters,” wrote High Frequency Economics chief economist Jim O’Sullivan in a research note.
On the negative side of the ledger, falling oil prices are bad for U.S. energy producers. But analysts expect only a limited impact on the ongoing shale boom that has been touted as a once-in-a-generation opportunity by House Speaker John Boehner.
Goldman Sachs economist Alec Phillips wrote Tuesday that “oil- and gas-related employment looks likely to continue to grow despite lower prices, since production is still expected to rise.”
“While the tradeoff between lower energy costs for U.S. consumers and lower oil-related domestic economic activity is somewhat less beneficial as prices reach the point where U.S. production and investment slows more significantly, we still expect the net effect from lower oil prices to be positive even at these lower oil price levels,” Phillips concluded. Specifically, Goldman Sachs estimated that the roughly 20 percent decline in oil prices since the first half the year was likely to boost the gross domestic product by 0.1 percentage point in 2015.
A modest boost, which could be swamped by many other macroeconomic factors, is all that should be expected from falling oil prices, said Lutz Kilian, an economist at the University of Michigan who has studied the effects of oil price movements.
“Please keep in mind that it takes substantial shifts in oil prices to really stimulate the economy. A $10 or $15 drop in oil prices is always welcome, but it is not going to get the economy going by itself, given that the share of oil use in the economy is quite small overall,” Kilian told the Washington Examiner, noting that oil price increases earlier in the decade did not have major damaging effects.
In the longer run, Kilian said, the U.S. stands to benefit from weakened global demand for oil and other commodities, as the accompanying hit to exports wears off. But he also warned that other factors could come into play and undermine the advantage. “There always are new shocks arising in markets,” he said.
