It seems that the market quiescence of August and September has once again been replaced by a scary roller Coaster styled October! Yet currently, the benefit of about ten years into Fracking and horizontal drilling for oil in the US is paying off big.
In the past five years, the five largest oil-producing states in the US have added more than 1.35 million jobs — roughly 16 percent of the jobs the nation added as a whole. And they account for 32 percent of all private sector jobs created since the worst of the Great Recession. And there are more benefits from this boom than just 1.35 million jobs!
Low fuel prices help boost economic growth by reducing fuel bills and leaving consumers and companies with more money to spend on other things. Problem is, two factors behind the oil-price drop — a weaker global economy and a stronger dollar — could hurt the U.S. economy by reducing exports, employment and spending. And all that, in turn, could outweigh the economic benefit of cheaper fuel.
According to Economist David Rosenberg every penny drop in gasoline prices increases household cash flow by about $1.5 billion a year. So far gasoline prices have dropped 9 cents in a week and are down 46.5 cents since the May peak and are 13 cents cheaper than a year ago. These numbers turn into increased household cash flow of $13, 5 billion, $69.75 billion and $19.5 billion respectively. Any of these numbers if they last, should boost the economy significantly as 70 percent of the US economy is driven by household spending.
Interestingly enough, American gasoline usage has fallen in recent years as a share of Americans’ disposable income, thanks largely to more fuel-efficient vehicles, telecommuting, urbanization and other macro factors. Gasoline as a percent of median income is current 3.73%, up from around 2% in the late 1990s-early 2000s, but down from over 6% in 1980, according to GAMCO.
Given stagnant wages and rising costs for other staples — most notably housing, healthcare, education and childcare — any savings due to lower gas prices will be most welcomed by cash-strapped American households. Every 10-cent drop in the price of gasoline translates into $120 of annual savings for the average American household, The NYT reports. These are real savings and are the equivalent of a tax refund without harming the US Treasury.
So, although the current economic headlines is about volatility, the real story is the unsung improvement in household cash flow and how that will help the US improve despite the economic slowdown in the rest of the world.
Sources:
Oils fall good for everyone – except energy producers
Gasoline prices lowest in nearly a year
This time, cheaper gas may fuel trouble
Drop in oil prices good for consumers, but could hurt US economy
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How will gas prices impact our economy?
