In general, the significant decline in recent months of both crude oil and gasoline prices will benefit American households and the American economy. However, lower prices will not be beneficial to everyone.
The Winners
Oil consumers will benefit the most, ranging from individual households to nations of net oil consumers. Per a New York Times article (dated November 13, 2014), Americans spend $1 billion per day on gasoline with a reported national average of $2.89 per gallon versus $3.26 a year ago. That amounts to consumers saving $70 billion annually or about $400 per US household. Heating oil is also 15% lower now than last winter. The chief executive of Caterpillar Inc. was quoted saying, “If oil stays at current levels into next year, this will produce economic stimulus that the Federal Reserve or Congress could never do”. It is expected this year alone, US GDP will be increased by 0.5% in the fourth quarter.
Many American businesses will also benefit greatly. Small businesses, which spend more on transportation costs than businesses of any other size, in consumer goods and the transportation industry, will especially benefit. According to Yahoo! Finance, already since July the US transport stocks in the S&P 500 have outperformed the S&P 500 Index by 5.7% at this writing.
The Losers
The losers will likely be oil producers including the governments of Saudi Arabia, The United Kingdom, Canada, Norway, Russia, Venezuela and others. The economies of these countries are dependent on their net oil revenues. It was reported by Deutsche Bank research that Russia receives half of its national income from oil leases. With world prices down nearly 25%, these countries will most certainly see a significant decrease in revenue.
The US oil and natural gas industry amount to about 8% of The US economy as reported by GDP and will be net losers during this period of low oil prices. Per Money Beat, already since July the energy sector stocks in the S&P 500 have created a 2% drag on the S&P 500 Index. If low prices persist into next year, oil drillers and the large integrated energy companies may be forced to reduce jobs.
Investors
For US stock investors, certain market sectors other than energy could benefit from low inflation, possible freed up consumer disposable income and overall consumer optimism. There is some speculation just in the last day that this very low rate of inflation may cause the Federal Reserve to wait even longer to raise interest rates. For high yield bond investors, some caution may be in order as smaller energy companies have used corporate bond issues to finance operations and exploration into areas better suited in a higher oil price environment.
We at Summit Financial Advisors will remain watchful of this interesting and dynamic element for both new risks and opportunities.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal.