Cheap Oil Will Not Juice US Economy

Cheap Oil Will Not Juice US EconomyCheap Oil Will Not Juice US Economy

US consumers are cautious about spending their windfall from cheap gasoline and are saving more, according to a Reuters/Ipsos poll and official data, suggesting low oil prices are less of a boon for the US economy than in the past.

Commerce Department data shows that the crude’s 70% drop since mid-2014 cut households’ annual spending on gasoline and other energy products by $115 billion, equivalent to roughly 0.5% of gross domestic product, Reuters reported.

At the same time, however, savings increased by $121 billion and while the data gives no indication where the money has come from, the survey suggests the windfall accounted for a significant part of the sum.

The poll shows 75% of 3,068 Americans who answered questions on gasoline savings said the extra money helped them cover basic needs and the majority have not used their windfall to buy big ticket items.

Over 40% of respondents said the savings had helped them pay down debts, according to the Jan. 15-27 online poll, which had a credibility interval of plus or minus 1.8 percentage points.

Some economists say such doubts and the still-fresh scars of the 2007-09 recession could explain the muted effect of cheap gas on consumption. For example, the economy only in mid-2014 recovered the more than 7 million jobs lost during the downturn.

“We don’t seem to be getting the benefits from cheaper gasoline that we did when the economy was healthier,” said veteran oil economist and independent consultant Phil Verleger.

Dallas Federal Reserve President Robert Kaplan said another reason Americans appeared wary of spending what they saved at the pump could be that more and more of them were approaching retirement.

The Dallas Fed, whose area includes the oil patches of Texas, Louisiana and New Mexico, estimates that a 50% fall in oil prices now adds around 0.5 percentage points to economic growth over a year, half of the impact seen before America’s oil boom.

One reason is that the oil sector has grown over the past decade, so spending and job cuts there weigh more on the whole economy. Cheaper oil also helps less because cars and machinery have become more fuel efficient, according to the Dallas Fed.

However, tumbling prices forced producers and oilfield services companies to slash budgets, driving some into bankruptcy and many deep into the red.

Markets have grown so bearish about the sector that when oil producer Hess reported a fourth quarter loss of over $1.8 billion, its shares have risen because investors had braced for even more damage.