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Tuesday, February 2, 2016

The Drop in Oil Prices Has Saved Consumers Money, But Other Effects are Far From Positive

From Forbes:
The rapid decline in oil (and gas) prices produced a substantial reduction in costs for energy users. Consumers spend $800 a year less at the pump (multiply by 150 million households), pay less for heating oil and less for gas generated electricity. Firms benefit from lower gas and diesel prices, lower electric bills and heating bills. Energy users such as major chemical companies save a bundle producing products such as plastics and fertilizer which require large amounts of hydrocarbons to manufacture. These savings are passed on to customers in lower prices. All in all, a very strong stimulus.

But consumer spending has not responded to lower gas prices as many expected, with consumers saving a large share of the gains. Typically, consumers save most of a “windfall income gain”, one that was not expected. If consumers thought the decline in gas prices were more “permanent”, they would spend more of the savings. If your uncle gives you a $1000, you are likely to spend some of it and save most. But if you expect your uncle to give you $1000 every year, you’ll spend most of it. The longer low oil prices persist, the higher the percentage of the savings consumers will spend. 
However, there are several negative impacts of the decline in oil prices that muted the stimulus: 
1. An immediate suspension of $400 billion in energy related development projects and a loss of over 120,000 energy related jobs, a near-term shock to the economy that won’t continue. 
2. An immediate reduction in the value of energy equity shares and a sympathetic reduction in other stock prices, stock prices fell dramatically.
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