“For the first time since 2004, U.S. drivers are expected to pay an average of less than $2 a gallon for regular grade gasoline this year.” That headline from the Energy Information Administration (EIA) is the sort that economists once upon a time would have welcomed as a slam-dunk for future growth. It used to be that when consumers paid less at the pumps, they would spend their windfalls as if they had just won on a weekly scratch-off ticket.
But something strange has occurred since the last recession: Americans have discovered their parsimonious sides. Last year, the average household saved $660 at the pump, but instead of buying a bunch of other stuff with that money, people chose to spend more on . . . gasoline! A report by the JPMorgan Chase Institute found that consumers didn’t just take more road trips, but they used about half the money they could have saved and switched from regular gas to high-octane.
Of course, plenty of consumers chose to pay off debt or bank a chunk of their gas savings money. As of January, the personal savings rate stood at 5.5 percent, more than twice the level seen in the month before the start of the recession. While the former financial adviser in me loves this trend, economists are worried. The reason is that the consumer usually helps to counterbalance the negatives associated with lower oil prices, starting with problems in the energy sector.
After a big boom from 2010 to 2014, the mining industry, which includes oil, gas and coal, lost 129,000 jobs last year, and energy companies had to shelve hundreds of billions of dollars of spending last year. With oil careening toward $30 a barrel, the new investments just didn’t make sense.
Another indirect hit of oil’s plunge was seen in RealtyTrac’s final foreclosure numbers for 2015. In a year when the nation as a whole happily enjoyed lower foreclosure activity, it increased in places like Texas, North Dakota and Oklahoma — states that rely at least in part on the energy industry. Of course, those states that relied on tax receipts from the oil boom will have to rework their budgets in light of the current turmoil.
And the 70 percent plunge in crude oil from the June 2014 highs has also put pressure on the banking sector, due to loans that they extended to small oil startups. Low prices are already making it difficult for some energy companies to repay their loans. According to Mark Mills, a senior fellow at the Manhattan Institute, “The shale industry expanded during a period of cheap money,” but the loans worked only if oil stayed above $50 a barrel. That seemed like a pretty good bet, considering that between 2011 and 2014, the average price was $95.05 a barrel.
Last year, oil prices averaged $48.67 per barrel; this year, it is expected to average just $37.59, and the EIA estimates that oil will get to $50 a barrel only in 2017. With these prices, it’s likely that banks may have to write down some portion of their outstanding energy sector debt.
Does this mean that low oil prices are bad for the economy? I just don’t see it over the long term. The U.S. retail regular gasoline price is forecast to average $1.98 a gallon this year and $2.21 a gallon in 2017, compared with $2.43 in 2015. Presuming no exogenous shocks to the financial system (China, Russia, emerging markets), and continued progress in the jobs market, I’m guessing that consumers will feel more comfortable spending a portion of their gas savings.