At first glance the dramatically lower oil prices is great news because just about everyone we know will have more money in their pocket at the end of the week. The middle class and the lower income will feel the greatest relief. Every business that buys fuel for its fleet just got a boost in their bottom line.
Theoretically, though, every dollar gained by fuel consumers is a dollar not gained by the owners of the commodity. To the extent that the owners of this commodity are domestic the net effect on the economy is a wash. But to the extent that the loser in this price shift is a foreign source then this will have a greater impact of the balance of trade and likely strengthening of the dollar. A strong dollar makes our export more expensive, especially relative to a currency like the Russian ruble which is in a state of collapse. Imports on the other hand are cheaper. This is good for domestic consumers, bad for domestic producers who must now compete with cheaper imports.
The oil price drop highlights the foolishness of many of our Congressional leaders who have blamed greedy speculators for the higher price of oil in the past. Did these greedy bastards just get the Christmas spirit? It also highlights the completely ineffective and misguided energy policy of this administration; making reckless loans for risky unproven green energy project that often ended in bankruptcy and failure while the cronies lined their pockets getting a great return for their campaign contributions.
The oil and gas energy industry, demonized by this progressive administration, have not only aided the lower income with lower fuel prices, but they also were the largest source of job creation. The president and his party promised huge job growth from their investment in green energy and it proved to be just another lie. They were bailed out by the antithesis of their policy.
Because such a large portion of the new jobs came from the oil and gas industry, lower oil prices will likely shelve new exploration and extraction projects and hurt job growth in the one industry that has created the most new jobs. Will this be offset by the stimulus of an extra thirty bucks a week in everyone’s pocket? Somehow, I do not think so, but we will see. It is possible that lower fuel prices will hurt job growth because, while lower prices may decrease job creation in the oil business, many of the friction costs from the regulatory state still burden most other businesses. The job growth from entrepreneurial activity outside the oil industry remains stagnant.
The true value of the oil price decline is noted by economist Mark Perry in his blog, Carpe Diem. He notes here [1]:
Incorporating the combined effects of: a) the increase in average fuel economy over time, b) the increase in the average hourly wage, and c) falling gas prices, the chart above shows the number of minutes of work required to buy enough gasoline to drive 100 miles. At 27.2 minutes, the current cost of gas in minutes worked to drive 100 miles is the lowest since 1999 (26.3 minutes). If gas prices fall another 26 cents per gallon from $2.36 currently to $2.10 per gallon, gas prices adjusted for fuel economy and wages would be the cheapest in US history. In some states [2] like Oklahoma ($2.03), Missouri ($2.04), Kansas ($2.11), Texas ($2.13) and Indiana ($2.14), gas prices are already below or near that level.