Analysts: Low Oil Price A Positive For US Econ; Boost Spending
By Alex Alexandrov
WASHINGTON (MNI) - The decrease in the price of oil is a net positive for the U.S. economy, boosting consumer spending while restraining inflation, according to analysts interviewed by MNI.
At the time of writing, Brent crude was trading at $78.06 per barrel. The price of Brent was $84 per barrel at the end of October, down 25% from nearly $112 in June, according to the U.S. Energy Information Administration.
The sharp drop is the result of a convergence of a number of market forces, according to oil market analysts.
"The world economy is in a bit of a slump, but the big factor has been the sustained increase in production from the United States," Dan Kish, senior vice president for Policy at the Institute for Energy Research, told MNI. "This is a classic economic model where supply has increased but demand is static."
James Williams, president of energy consulting firm WTRG said in a phone interview that, "We have seen gasoline and diesel prices decrease, which leads to lower transportation costs."
"Hence, we should see a decline in food prices and more money in consumers' pockets," he added.
Federal Reserve officials also judge the fall in oil prices, and the knock-on effect on gasoline prices, as a positive for the economy.
According to the minutes of the October meeting of the Federal Open Market Committee, "Many participants judged that the recent significant decline in energy prices would provide a boost to consumer spending over the near term, with several of them noting that the drop in gasoline prices would benefit lower-income households in particular."
According to Chris Christopher, director of Consumer Economics at IHS, "Lower prices are helping boost spending just when the U.S. economy needs it the most."
He wrote separately in a research note published last week that, "we are forecasting 2014 holiday sales to rise 4.2% above last year." Holiday retail sales in 2013 were $579.29 billion.
"Lower- and middle-income households in general, who spend a higher proportion of income on gasoline, are likely to see significant relief from the fall in pump prices," Christopher and Doug Handler, chief U.S. economist at IHS, wrote in another research note published Tuesday.
"In part because of this distribution, most of the windfall will be spent rather than saved or used to pare down debt," they said.
All the economists interviewed by MNI said cheap oil positively affects U.S. GDP.
"When you lower the cost of energy, you spur GDP," Kish said.
"The high oil price has definitely been a drag on economic growth coming out of the recession," Williams said. However, he added a cautionary note.
"Oil and gas drilling activity is labor and capital intensive, and we are eventually going to see a slower rate of growth," Williams said.
It remains to be seen if oil prices will continue to decline and how long they will stay at such low levels.
"The key to how low oil prices will go will depend on the outcome of the upcoming OPEC meeting," Virendra Chauhan, an oil analyst with research consultancy Energy Aspects, told MNI in a phone interview.
The next meeting of the 12-member OPEC is on November 27 in Vienna, Austria.
"They know they need to cut production, but whether they can reach a collective agreement to do that remains to be seen," Chauhan said. "Some of the more cash-strapped members won't just let the price drop without a response. I suspect there will be some action, but how that works is anyone's guess."
"Oil prices are going to stay where they are," IHS' Christopher told MNI. "Prices are going to start creeping up around 2016 from their current levels because global economic growth is going to be stronger."
