uploads/2015/09/The-Average-American-Spending-on-Gas-Is-Likely-to-Fall-in-2015-2015-09-011.jpg

Is Cheaper Oil Good or Bad for the US Economy?

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3. Cheaper oil is a positive for US consumers

Though the US now has a large domestic energy industry that is feeling the pain from lower oil and the US consumer certainly faces many headwinds, cheaper gasoline should support US consumption.

is cheaper oil good or bad for the US

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Market Realist – Is cheaper oil good or bad for the US?

Crude oil (USO) prices have collapsed by over 60% in the last 12 months, adversely affecting energy sector earnings (IYE). In fact, the sector single-handedly pulled down the year-over-year earnings for the S&P 500 (IVV) in 2Q15. As we saw previously, the energy sector now makes up a bigger portion of the US economy, so lower oil prices negatively affect the economy.

On the flip side, however, a lower gas price is a windfall for consumers, as they have to spend less on fuel. Plus, lower transportation costs could cascade down to lower consumer prices. The graph above shows the estimated expenditure on fuel by an average American over the last four years.

According to the University of Michigan Transportation Research Institute, an average American consumed ~400 gallons of gasoline in 2013. The graph assumes that this number remained constant since 2011 and estimates the total consumption per person using the average gas price for each year. This year so far, the gas price has averaged ~$2.50 per gallon. Assuming that it will average $2.50 for the rest of the year, an average American will spend only ~$1,000 for gas, compared to ~$1,350 last year.

The savings at the pump can be spent elsewhere, so they can boost consumption. However, over the last few months, Americans have spent the windfall to save more and service their debts. That said, consumers could start spending more sooner or later as oil prices are likely to stay low while the labor markets remain robust, which boosts disposable income. Disposable income is the biggest driver of consumption.

Higher consumption is a positive for consumer-related sectors like discretionary (XLP) and staples (XLY), however, most of these stocks already reflect the good news.

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