Oiginally published on Marketwatch.com’s website http://www.marketwatch.com/story/the-impact-of-falling-oil-prices-on-your-wallet-2015-01-05?link=kiosk
Most American consumers are delighted with the recent slide in the price of crude oil, which has lowered gasoline prices significantly. Falling gas prices have an effect on consumer prices. The most recent CPI report was released on Dec.17 and consumer prices had fallen by 0.3%. The core CPI, which excludes the volatile food and energy groups, rose by a mere 0.1%.
Last year at this time the average price per gallon for unleaded gasoline in the U.S. was $3.32. As of Dec. 31, according to the AAA, the average price had fallen to $2.26 per gallon. Just over one dollar may not sound like that much, but it can have a substantial impact on the economy. According to David Rosenberg at Gluskin-Sheff, for every penny that the price of gas falls, the savings per year to U.S. consumers is about $1.5 billion dollars. So the $1.06 drop we’ve seen over the past year will put over $150 billion into consumers’ pockets to be spent elsewhere.
It has the same effect as getting a large tax cut or a raise in pay and will really help retirees, especially those on a fixed income who still drive and consume gasoline — and that is just the savings at the pump. The effect of the lower energy prices will trickle over to other areas of the economy, from airlines to trucking and even your local pizza delivery. It looks like retirees may need some of the savings to buy food. According to the BLS, the price of ground beef just hit an all-time high of $4.20 per pound. So, if you like cheeseburgers, you might want to be prepared for higher prices there.
There are advantages and some disadvantages to lower oil prices. The economies of oil exporting countries will be hurt. Overall, developed oil-importing countries will benefit. Small oil and gas productions companies could suffer and we could see some layoffs and possibly even some bankruptcies in that sector. If you hold high-yield bonds, you may want to review your portfolio for exposure to the oil-and-gas sector. There could also be an adverse impact on alternative energy producers.
Overall, low oil prices should benefit the U.S. economy as the oil and gas industry only accounts for about 2% of our gross output. The remainder of the economy stands to gain and the typical consumer will have some extra dollars in their pocket to spend this holiday season.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.