Is Cheap Gas Really a Good Thing for the U.S. Economy?
While the stock market made new highs and breathtaking lows over the last few weeks, one sector continued to simply fall, dare I say plummet: oil. Down with it went the price of a gallon of gasoline. Headlines warn that low-priced gas can hurt the economy but the benefit of cheap energy on your wallet remains, for now, clear.
In June, a barrel of oil cost $107. Today we are at slightly less than $50 per barrel, a drop of some 47% and more than a five-year low.
Boo-hoo for the likes of Exxon Mobile (XOM), but this sure helped us all at the pump. Nationally, gas goes for $2.20 a gallon on average, according to AAA. To put that in perspective, in June motorists in Atlanta, where I live, paid closer to $3.70 a gallon.
Oil prices dropped since summer for many reasons. First, the slowing economies of China and Europe no longer demand black gold at the old pace. ” Second, new drilling technology, tremendous amounts of new supply here in America and Middle East oil powerhouses deciding to level output all contribute to the persistently higher supply of oil right now.
In a much anticipated announcement on Thanksgiving Day, the Organization of the Petroleum Exporting Countries decided to not cut production targets. The oil-producing nations had the option, of course, of filling and exporting fewer barrels of oil per day and thus stabilizing the price. They declined.
Why? Oil producers – and OPEC competitors – all over the world can’t survive with oil prices much lower than today. The new U.S. oil producers represent some of that contingency; many other international producers will likely shut down higher-cost oil exploration, as well.
The countries in OPEC, especially Saudi Arabia, are flexing muscles to put themselves back into the director’s chair. Unfortunately for the Saudis, this tactic won’t play out in the long run: They depend too much on their one-trick economy.
While many energy sector stocks were up around 15% last summer, they now stare at a 10% dip in returns for the year. The major U.S. oil companies plan for scenarios like this, though, and are probably set to ride out this price plunge.
In the meantime, U.S. economic growth for the third quarter was actually revised up, from 3.5% to 3.9%. Easy to see where that comes from: Every $1 less per gallon at the pump means you and I save about $1,000 a year on gas. How much does that help a family bringing in $50,000 a year?
That family spends the extra cash somewhere – at Target (TGT) or on Amazon (AMZN), for a ticket from an airline or a gift in a neighborhood shop. On Wall Street, stocks of retailers and hotels mostly rallied even as oil prices dropped.
Profits (and stocks) soared for airlines and other heavy users of fuel such as United Parcel Service (UPS) and FedEx (FDX). The chemical industry and producers of plastics, rubber, asphalt, paint and more saw an increase in value. Even agriculture got a bump – it takes gas to get those crops to the original kind of market.
As OPEC keeps the price of oil low around the globe, leveraged oil companies – ones with the most debt – no doubt feel the pain. U.S. oil stocks sure suffered. Yet the energy sector makes up less than 10% of the Standard & Poor’s 500; only a fraction of the overall market is hurt (so far). Can oil’s slippery freefall take out some of the most marginal, borderline energy companies worldwide? Yes.
For now, the good still outweighs the bad. As long as OPEC plays the waiting game with competitors, you and I and the rest of the American consumers enjoy a huge boost.
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Written by Wes Moss, CFP, who is the chief investment strategist for Capital Investment Advisors and a partner at Wela, both in Atlanta. He hosts “Money Matters,” a live financial advice show on Atlanta’s News 95-5 and AM 750 WSB Radio. In 2014 Barron’s Magazine named him as one of America’s top 1,200 Financial Advisors. His newly released book, You Can Retire Sooner Than You Think published by McGraw Hill, is available on Amazon, iTunes and at your local bookstore.
Wes writes weekly about personal finance in the “Bargain Hunter Section” for AJC.com, the site of The Atlanta Journal-Constitution. Wes is also the editor and writer for About.com’s Personal Finance blog. Connect with Wes on Twitter at @WesMoss365 and on Facebook at Wes Moss Money Matters. You can also visit his website, WesMoss.com to learn more about Wes, and take his complimentary Money and Happiness Quiz.
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