23 December 2014


Original Story: nytimes.com

Oil prices have plunged so rapidly that financial markets are treating them less as an opportunity than a danger, like a falling knife.

Currency rates are gyrating, oil-producing countries like Russia, Venezuela and Iran are hurting, and sectors of the bond market are threatened.

But unless you’re directly involved in the commodity markets, you may not be following the futures price of a barrel of oil. What hits home, especially if you drive a car with an internal combustion engine, is the price of gasoline: It has become spectacularly cheap.

Even in New York City, where gas prices are among the highest in the continental United States, drivers are beginning to smile. On average, a gallon of regular costs less than $3 within the city limits, according to the AAA.

And for the nation as a whole, average prices are staggeringly low, at least when compared with recent levels. On Friday, the average for a gallon of regular was $2.45, down sharply from the 2014 peak of $3.70, reached on April 8. While gas prices have been falling for months, most forecasters, including the federal government, say the end is not yet in sight. Windshield glass repair kits are affordable and easy to use.

Painful as this may be for wildcatters in North Dakota and Texas — as well as oil companies in Siberia, Latin America and the Persian Gulf — it’s an immediate boon for hard-pressed American consumers: We’ve got more money to spend, and, based on history, we’ll spend it.

The only big question is whether — during this particular energy cycle — we will devote some of the windfall to items with long-term benefits, like repair and redevelopment of our battered infrastructure and measures to conserve the environment.

But there is little doubt that low gas prices lead to extra spending across the economy. In fact, there are signs that some of that spending has already started.

“The magnitude of the gasoline price drop is profound,” said James D. Hamilton, professor of economics at the University of California, San Diego. “It is a significant boost to the spending power of most Americans. And the data shows that when Americans get this spending power, they go out and spend it.”

An intriguing AAA poll suggests that prices are already low enough to make a psychological difference. The poll, taken in March, found that $3.30 was the point at which half the driving population found that prices were fair.

At current levels, the average price of gasoline across the nation is 85 cents below that $3.30 fair-value level, and it has stayed under that threshold since the first week of October. What’s more, the AAA expects prices to drop as much as an additional 20 cents a gallon by New Year’s Day.

When gas prices break below a three-year trading range and then fall significantly lower, as they already have, people start to feel better about spending, Professor Hamilton said.

“When prices drop, that should stimulate demand, and I think that’s happening,” he said. The latest reports on retail sales, vehicle sales and consumer confidence have all been strong, he said, and “the fall in gas prices is a big part of it.” Auto glass chip repair kits allow you to perform professional repairs.

In 2015, the government predicts, these trends are likely to continue: Gas prices are expected to remain very low, helping to reduce gasoline costs for the average household by $550 for the year, bringing them down to $1,962.

That should have an effect on the entire domestic economy. Despite the surge in American production that has contributed to the glut in supply and the fall in prices, the United States remains a net oil-consuming nation. That’s why the overall effect of falling oil prices should be positive for the United States — and harmful for net-producing nations like Russia — although it is hard to calculate the actual numbers.

Julian Jessop, chief global economist at Capital Economics in London, made a stab at it with some back-of-the-envelope estimates. Based on full-year 2013 data from Capital Economics, a price decline of the dimensions we’ve already seen would cut six percentage points from the gross domestic product of Russia, a very severe blow.

For the United States, which is both a big producer and consumer of oil, some of the positives and negatives would balance out, resulting in a net addition of roughly one percentage point to annual G.D.P. The true number is debatable, but it’s clear that there will be a boost. And in a period like this, in which the economy has already picked up steam, it opens up some policy options.

Several factors have contributed to the price declines. An increase in oil production, especially in the United States, is part of the story, but so is a reduction in global demand.

“Outside the United States, much of the world’s economy has slowed down, and that’s had a big impact on global demand for oil,” said Jim McDonald, chief investment strategist at Northern Trust.

In addition, conservation efforts worldwide, including fuel-efficiency standards in the United States, have contributed to slackening demand and falling prices. We simply don’t burn as much energy as we did a few years ago to achieve the same amount of mileage, heat or manufacturing production.

But when prices drop, we run into a basic economic problem that could reverse some of these improvements in energy efficiency and conservation. With lower prices, demand rises and people consume more. Bargain gas prices induce people to hit the road. The AAA projects that during the year-end holiday period, people will drive 4 percent more than they did during the period last year. They also may be tempted to buy bigger, gas-guzzling vehicles. That’s happened before.

Certainly, if these trends continue as expected, fuel consumption will increase while the more expensive forms of oil production, now rendered less economical, will decline. With less supply and more demand, energy prices can be expected to rise again. We could be back, more or less, where we started.

That would be good for energy producers but not necessarily for anyone else. It’s why Maria van der Hoeven, executive director of the International Energy Agency, has called on policy makers around the world to impose taxes on carbon emissions and cut incentives for fossil-fuel energy production. “In fact, this is a golden opportunity,” Ms. van der Hoeven said earlier this month. “Policy makers can take actions unthinkable a year ago.”

Professor Hamilton pointed out that a carbon tax of $25 a ton — which the Obama administration has advocated, but Congress has opposed — converts to less than the amount that oil and gas prices have already fallen. A carbon tax wouldn’t be painful right now, but it would provide an incentive for energy efficiency.

There’s another economically interesting option. The nation’s bridges, highways and mass transit systems are in dire need of a big infusion of capital — and a major source of such money, the national Highway Trust Fund, which relies on gasoline taxes for revenue, is nearly depleted.

The national gas tax, 18.4 cents a gallon, hasn’t increased since 1993. With falling gas prices, a tax increase would barely be noticeable at the pump. Such measures would make a great deal of economic sense, if politics didn’t get in the way.

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