With the howling of recession behind the fear-inducing Rocky Mountains, the U.S. economy The United States could meet an ally as unexpected as it is paradoxical: the fall in oil prices. Unexpected because just a few months ago, OPEC+ production cuts and tensions in the Middle East suggested a much higher barrel (from almost $100 in the fall of last year to around $70 today). And this is paradoxical because the United States has become, thanks to its own merits, a net exporter of oil, as well as the world’s largest producer. How does all this fit together?
The United States produces over 13 million barrels of crude oil every day. In addition, the country’s refineries pump out about 20 million barrels of refined products. This makes the United States the world’s largest producer of crude oil (Saudi Arabia and Russia appear in the background with about 9 or 10 million barrels) and also the world’s largest “refinery.”
The revolution of hydraulic fracturing (hydraulic fracturing) and heavy investment in refining (more in the past than today) have brought to light this kind of miracle: a country that, a little over a decade ago, needed to import oil in large quantities, is today a net exporter and, on top of that, achieved energy independence (The United States also produces a lot of gas, nuclear energy, etc.). However, and although this may seem contradictory, the current drop in oil prices will give its economy a boost.
America’s Engine Is Not Oil
Unlike countries like Saudi Arabia, Iraq or the United Arab Emirates (some OPEC classics), oil is not the engine of the American economy; yet it is a product that is consumed by almost the entire population, whether through gasoline, diesel, fuel oil… Thus, a drop in the price of crude oil benefits millions and millions of people, while it only harms a “larger sector.” of the industry (concentrated in a few practical reports).
In a more technical way, the experts of Capital Economics point out that “although the United States is a net exporter of oil (rather of products and crude oil: gasoline, kerosene, diesel, oil), the recent collapse in the price of crude oil will be a tailwind for the economy, since Lower Gasoline Prices Boost Consumer Confidence and their actual spending,” said Olivia Cross, an analyst at Capital Economics.
The American consumer is the real driver of the world’s largest economy (it accounts for two-thirds of it) and has stoically endured what was thrown at it: first abrasive inflation, then high interest rates. Although the administration’s Covid controls led to excessive saving and the strong post-pandemic job market helped, the average American kept spending even when the tap stopped flowing. Given the uncertainty ahead (a deteriorating job market), cheaper gasoline and lighter pockets will be of the utmost importance.
In fact, some recent analyses indicate that a recession in the United States seems inevitable given consumer “fatigue,” which sees all accumulated savings evaporate at the same time as the job market deteriorates. However, this drop in oil prices could end up being a kind of ‘Hi’, a kind of relatively progressive tax cut (it benefits the lowest incomes the most) that gives a new boost to the American economy. The propensity to consume is higher in low and lower middle incomes, so cheaper gasoline can increase the disposable income of millions of households who will use the “savings” on gasoline to spend on other things.
The oil crash
Although it has recovered in recent days, the barrel of West Texas Intermediate (WTI), the benchmark crude oil in the United States, has fallen by 18% since July and the collapse in wholesale prices suggests a drop in retail prices. three dollars a gallon. If it continues, the decline in nominal gasoline spending will leave Households have an additional $45 billion to spend on other goods and services, which could boost real consumption by up to 0.3%.
In its latest short-term energy outlook, released in early August, before the recent collapse in crude oil, the U.S. Energy Information Administration (EIA) estimated an average price of $3.3 per gallon for 2024 and 2025. Below $3.5 in 2023 and so far $4 in 2022. In addition, EIA Administrator Joe DeCarolis noted that “American motorists are using less gasoline than before the pandemic, and we hope that “this will help keep gasoline prices from rising if oil prices rise.”
In hindsight, it is true that when oil prices fell in 2014, American households saved most of the windfall. The recent weakness in consumer confidence suggests that consumers may now be similarly cautious. But, Capital Economics points out, those savings would dampen consumption if the economy weakened further.
The oil drop is like a tax cut
“Low-income households will benefit the most from their purchasing power and, having been hit hard by the recent spike in inflation, we believe they are more likely to spend rather than save their extra income,” Cross said. Even before the expected sharp decline, lower retail gasoline prices supported retail sales.
“Falling oil and gasoline prices boost consumption“, a reassuring sign for the health of the American consumer and a reminder that falling energy prices tend to prolong economic expansions,” say DataTrek strategists Nicholas Colas and Jessica Rabe.
As for inflation, it is already known that favorable base effects will bring it back to target quickly in 2025, but the drop in oil prices means that headline inflation, as measured by the CPI, is likely to fall below 2%. “While the Fed will largely ignore this temporary decline, there will be some impact on the decline in core inflation through components closely linked to oil prices, such as airfares. This should allay concerns that rising real disposable income could revive inflationary pressures,” Cross adds.
Households will be particularly attentive to this decline in headline and energy inflation. Lower gasoline prices will reduce household inflation expectations, which have recently been a major driver of consumer confidence. “A relaxation of inflationary fears could improve consumer perceptions of the current administration and, at this stage of the election, increase Democrat Kamala Harris’ chances of winning the November presidential election,” concludes the Capital Economics strategist.
The big question that remains is how much of this consumer support offsets the damage that a drop in the oil price would hypothetically do to the US as a net oil exporter. At Capital Economics, they focus on investment. “Even though the US is now a net oil exporter, we think investment will hold up much better than it did in 2014/15. Mining investment has been relatively immune to the rebound in oil prices since 2021, as technological advances have made it easier to raise oil prices. production without higher capital expenditure. This reduces the risk of a significant decline in investment like in 2014/15,” Cross concludes.
