The evidence continues to mount that the U.S. economy’s tepid recovery is finally turning more robust. Growth figures are solid, the unemployment rate continues to drop, and wages are starting to increase—albeit very slowly. Still, it wouldn’t hurt to have some insurance, especially when other developed economies are on shaky ground. Say, for example, a tax cut? It wouldn’t hurt, but in this gridlocked political environment, it’s also a non-starter.
Enter the price of crude. Brent has been trending steadily downward since its high of $115 per barrel in June, and it currently sits at $85 per barrel. West Texas Intermediate has followed suit, dropping from $108 per barrel in June to $78 per barrel as of early November. Nor do the trends appear likely to reverse anytime soon.
Thanks in part to U.S. shale production, growth in supply from non-OPEC countries is exceeding global demand growth by as much as 1 million barrels a day. OPEC doesn’t appear to be in a hurry to cut production, and last week Saudi Arabia unexpectedly reduced the cost of crude it sells to the U.S. Coming at it from a demand perspective, oil prices have surely been constrained by sluggish growth in Europe and China. Altogether, Credit Suisse expects the price of oil to keep falling, and lowered its forecasts for Brent from $98 per barrel to $92 for the fourth quarter, and predicts an average of $87 a barrel for the first quarter of next year.
For American drivers, this means celebration at the pump. On November 10, the average price of regular unleaded gasoline had fallen for 46 consecutive days, and on November 1 it dropped below $3 per gallon for the first time since 2010, according to the American Automobile Association. If oil prices follow the bank’s forecasts, nominal consumer spending on energy will fall from 3.2 percent in June of this year to 2.5 percent by March 2015, giving consumers an effective tax cut of about $80 billion, according to a report by Credit Suisse analysts James Sweeney and Jay Feldman. That would be the lightest aggregate gasoline bill for U.S. households in more than a decade. It would be especially positive for lower-income Americans: spending on gasoline accounts for 13 percent of pre-tax income in the lowest quintile of U.S. households, compared with 2.5 percent in the highest quintile.
The extra cash may also spur more holiday cheer, fueling greater consumer demand as Thanksgiving approaches. That’s especially the case since more Americans are earning a paycheck: the U.S. unemployment rate fell to 5.8 percent in October, the lowest level since 2008. Credit Suisse says lower energy costs have already helped consumer confidence, which rose 5.5 points in October to 94.5, the highest level in seven years. Chain-store sales also increased 0.6 percent last month, according to the International Council of Shopping Centers. And while a prolonged period of low prices may put a damper on new investment in the U.S. oil industry, it’s unlikely to curtail job growth since only 0.6 percent of American jobs are in energy extraction.
And what of broader consumer prices? If oil stays low, headline inflation could slow to 1 percent by the end of the first quarter of next year and to as low as 0.5 percent in the second quarter, according to Credit Suisse. That might even persuade the Federal Reserve to postpone its highly anticipated interest rate hike, currently expected by Credit Suisse in June 2015—which would amount to yet another plus for economic growth.
Photo of U.S. currency courtesy of Shutterstock.com.