The average American household uses roughly 600 gallons of gasoline a year. A $1 drop equates to around $50/month of extra disposable income. Another way to measure this is to look at what is spent at gas stations versus other retail establishments. Over the past decade, on average roughly 10.5 percent of overall retail spending occurred at gas stations. Last November, that percentage dropped below 9 percent, the lowest level since February 2009 (and that is not accounting for the dramatic fall in oil prices over the past six weeks). The money saved at the pump typically winds up in other places.
Market Realist – The slump in oil prices is a boon for consumers.
The graph above shows the total annual average household expenditure on gasoline—assuming an annual gasoline consumption of ~600 gallons per household. In 2015, the average gas price has been $2.16 per gallon, so far. Assuming that this remains the same, the total expenditure on gas would reduce from $2,014.60 per household to $1,299.60 per household in 2015. This would be a savings of around $715 per household.
However, oil (USO) prices could increase. As a result, the household expenditure on gasoline could be more than the $1,299.60 stated above. However, it will likely be less than the expenditure for 2014. In 2014, it was a shade below the expenditure in 2013. The expenditure on gasoline increased over the last decade–except for 2009, when the Great Recession caused the dip in oil prices.
However, for February, London-traded Brent oil prices soared by $9.54, or 15.31%. This was the first monthly gain since June 2014.
These savings could be a great boon for the US economy, equities (SPY)(IVV), and consumer-related sectors—like retail (XRT), consumer discretionary (XLY), and so on. The next part will explain this in detail.