Big Oil vs You: Who means more to the economy?

What’s better for the economy, weak oil prices or strong ones? What’s more beneficial for US economic growth, strong profits and capex spending by Big Oil or less pain at the pump for consumers?

Economists have been batting this issue back and forth as oil has slid lower for the last three weeks. The global economics team at Bank of America Merrill Lynch weighed in with the idea that a 25 dollar drop in US crude oil prices could be good for as much as 40 basis points worth of GDP growth over two years. That’s doesn’t sound like much – until you realize the global economy is bumping along at something like 2 percent annual growth these days (we’re looking 3ish while Europe looks 1ish).

Here’s Ethan Harris & Co on the effects of crude’s slide, through the prism of large producers versus your family’s ability to spend elsewhere:

The Big Five versus Joe Six Pack

How much does this boost growth? At first sight, not very much. After all, the US is becoming increasingly energy independent. The monthly energy trade deficit dropped to just $13.1bn in August. For argument’s sake, if we assume the trend since 2008 continues, the deficit will be zero by late 2018 (Chart 10). Hence, the windfall of lower prices to consumers is almost matched by the loss to producers. Nonetheless, we would expect a net stimulus to growth in the near term. The big oil producers are flush with profits and cash.

For example, the Big Five integrated oil and gas producers had a total profit of $93bn in 2013 and ended the year with cash balances of almost $60bn. With such a large cushion of savings, we would expect them to respond slowly to weaker profit growth. Of course, if oil prices remain very low, over time, this will discourage investment and eventually lower the growth in oil production.

By contrast, consumers will likely respond quickly to the saving in energy costs. Many families live “hand to mouth”, spending whatever income is available. The Survey of Consumer Finances found that 47% of families had no savings in 2013, up from 44% in the more healthy 2004 economy. Over time, energy costs have become a much bigger part of budgets for low income families. In 2012, families with income below $50,000 spent an average of 21.4% of their income on energy. This is almost double the share in 2001, and it is almost triple the share for families with income above $50,000.

Josh here – To me, the more interesting question is which is better for the stock market – weak or strong oil. Over the last three weeks, the correlation between oil prices and European stocks has been .90 – as close to a perfect correlation as you could ask for. Which tells me the sellers in both are worried about the same thing: Disinflation or deflation taking root globally. Hard to argue lower oil is good for stocks until we start to hear about consumers becoming emboldened because of it.

We’re not there yet.

Source:

Macro policy: no room for error
Bank of America Merrill Lynch – October 17th 2014

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Lance commented on Nov 29

    .

    ñïñ!!