Yahoo Finance US households will get a $40 billion windfall from falling oil prices
Oil prices have fallen over 25% since early October, and while that has contributed to market turmoil, it also means a windfall for households that consume petroleum products.
Demand for oil-based products like gas and heating oil isn’t something that changes very much: People need to heat their houses and get to work in their cars. So with that fixed demand, this means that when prices fall, disposable income rises.
Charting gasoline prices and spending on gasoline together illustrates how tight this relationship is.
According to a research note from Capital Economics, the current rout in oil will lower annualized spending on gasoline from $320 billion to $280 billion, a savings of $40 billion per year.
Consumer confidence is still high, so analysts view the cash to be destined for consumption on goods and services. While substantial, the figure will probably not be enough to counter the headwinds the market has faced stemming from rising interest rates.
Fundstrat noted the impact these falling prices will have on the economy as a whole, not just households. When oil’s $25 decline per barrel is calculated against the 20 million or so barrels the U.S. consumes every day, this yearly number balloons to $182 billion in savings.
The savings also comes at an interesting time when the U.S. is seeing rising natural gas prices and a trade war with China. For the natural gas, Capital Economics views the hike as only offsetting a small amount of the gasoline savings.
As for China, Fundstrat sees the boost to household income as completely overcoming whatever price hikes tariffs on consumer products create — and significantly. The incremental cost from Chinese tariffs is a mere $58 billion, only a third the size of the oil impact.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, retail, personal finance, and more. Follow him on Twitter @ewolffmann.
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