Views

Barrel Half Full

21st January 2015

As the price of oil continues to languish in the mid-$40 per barrel, down from over $100 last June, markets seem to be ignoring the positive and focusing on the negative: broader US and world equity markets are down on the year, oil and oil-servicing companies are taking a huge hit, and some oil-producing sovereigns with low reserves could be facing severe deficits (Iran, Algeria, and Venezuela in particular according to JP Morgan). But as Larry Fink, chief executive of BlackRock recently put it, “This is the biggest redistribution of wealth we have seen in a long time, out of oil exporting nations and into importing nations, and into the US consumer, and this is going to help GDP globally over the course of the year,” he said. “I am surprised how negative the narrative is.”

A recent article in the New York Times entitled “What’s So Bad About Cheap Oil?” seems to agree with Mr. Fink, making the case that the winners outnumber the losers in this sub-$50 oil world. While the energy universe could lose about $150 billion in economic output from the oil price drop, other areas of the economy could gain by over $400 billion. According to the Times, “The net effect is double the annual value of the two percentage point payroll tax cut in 2011 and 2012, which provided a big increase to consumer spending.”

As gas prices fall to $2 per gallon in the United States, the annual savings to the average American family has been cited as $750 per year by the Wall Street Journal up to $1,000 by an energy private equity firm with which we spoke. That range is about two percent of the national average wage for 2013 of $44,888 according to the US Social Security Administration. With wage growth tepid at 1.7% (basically keeping pace with inflation), this extra cash in consumers’ pockets is meaningful and could make a material difference to GDP going forward, with some predicting an additional one percentage point added to real US GDP growth. That is a significant increase above the 2.3% annual GDP growth trend. The same could be true in the UK, with at least one 2015 UK GDP estimate revised up from 2.4% to 2.9% on the back of the fall in energy prices.

So yes, markets are trembling as they tend to do when headlines are sensational. But in a world of $45 oil and $2 gasoline, the focus should be on the positive: less money to fill up the tank means more money to spend elsewhere. Perhaps the redistribution of wealth from oil producers to consumers could lead to the demand-side jolt the global economy needs.