The price of oil continues to drop due to concerns of a global economic slowdown coupled with an apparent boom in US oil production. Even more, the recent 20% price drop over the past month is showing no signs of stabilizing. Having said that, consumers and certain businesses stand to benefit as a result of the big drop in oil prices.
How much will the price of oil drop?
Many economists are forecasting that the price of oil will continue to decline into the low to mid $60 range. They attribute much of this forecast to a continued global economic slowdown as well as a surprising boom in US oil production.
How will this impact prices at the pump?
Generally speaking, a $10 decrease in the price of oil will result in a $0.20 to $0.30 drop in the price of gas. With the price of crude oil currently at $80, a $10 decrease to $70 would cause gas prices on average to decrease below $3 per gallon. However, we should point out that 30% of the price is impacted by other other costs such as state taxes, marketing and distribution, refining and of course deflation, which is now an economic risk.
What does this mean for consumers?
Most consumers will benefit from an increase in purchasing power. Specifically, for every one-penny decrease in gas prices, US households will have over $1.5 billion more in annual household cash flow. Thus, if prices drop another 20 cents, US households will have $30 billion in additional household cash flow that they weren’t expecting.
Which businesses will benefit?
Given that US consumers will have more money in their pockets, we expect many big box retailers and other holiday season businesses to benefit. Holiday spending forecasts have already been revised upward or closer to 4% growth year over year. However, that forecast may be conservative if oil prices continue to fall.
Separately, there are many businesses in the transportation space that benefit from lower oil prices. Companies such as Fedex, UPS and other trucking companies will see improvements to their bottom-line as a result of lower fuel costs.
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