Photographer: Luke Sharrett/Bloomberg

Where’s That Cheap Oil Windfall?

Lower petroleum prices have yet to provide the expected boost

During a July 24 earnings call, Visa Chief Financial Officer Vasant Prabhu said gasoline prices have had a “significant negative impact” on business. MasterCard says cheaper gas took 2 percentage points off the growth in the value of its overall second-quarter transactions.

When the price of crude oil started dropping a year ago, credit card companies were thought to be among the winners. Consumers and businesses would soon be buying ever-cheaper gasoline made with ever-cheaper crude. The effect would be like a tax cut. The Department of Energy calculated in April that the average U.S. household would save about $700 on gasoline this year compared with 2014. Visa and MasterCard figured consumers would eventually spend that extra cash.

But so far the savings from cheaper gasoline haven’t shown up in other consumer spending. So Visa and MasterCard, which collect a tiny percentage of every transaction made with their cards, are stuck with consumers who are using their plastic to buy cheaper gas but not spending the extra money elsewhere. It doesn’t add up to profits for the companies.

In an Aug. 19 research note, Goldman Sachs acknowledged it had overestimated how quickly cheap oil and higher wages would increase personal consumption, which has grown 2.3 percent over the past year instead of the 4 percent the bank predicted in March. Initially, Americans put into savings what they didn’t spend at the pump. The share of income that households save is back to 4.8 percent, right where it was in June 2014 before climbing to 5.4 percent earlier this year. Goldman says the problem now is that incomes haven’t been rising as fast as expected. Lower oil prices haven’t led to a significant increase in consumption in any of the major economies, says Andrew Kenningham, senior international economist at Capital Economics.

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The rule of thumb has been that a sustained 50 percent drop in the price of crude lifts U.S. economic growth by about 1 percentage point. In April a trio of research economists at the Federal Reserve Bank of Dallas surmised that principle “should probably be halved” to about half of a percentage point.

Now that the U.S. is producing about two-thirds of the oil it consumes, low prices for crude are more of a drag than in the past—particularly as the industry adjusts to the global collapse of petroleum prices. “It has played out like a double-edged sword,” says David Rosenberg, chief economist at Gluskin Sheff. A decline in energy-related investment such as drilling equipment subtracted about half of a percentage point from U.S. growth during the first half of 2015, according to a Goldman research note from July. From December through June, energy companies cut about 70,000 jobs. Moody’s Analytics chief economist Mark Zandi thinks the industry may lose another 70,000 workers before things bottom out in February or March. “This is going to be more painful than I thought,” he says.

It’s not that cheap gasoline isn’t a positive. Demand for it has risen 4.4 percent year to date. A gallon of regular gasoline has averaged $2.50 so far this year, a dollar cheaper than a year ago. In terms of total miles driven, this summer driving season is finally seeing monthly totals surpass the prerecession peak in 2007. Refiners are going all-out to keep up. Through July the roughly 140 refineries in the U.S. were using 96 percent of their total combined capacity.

Not all Americans, however, have been enjoying lower gas prices. A handful of refinery outages through the year disrupted the flow of gasoline and actually raised prices in parts of the country. In February an explosion at an ExxonMobil refinery outside Los Angeles injured four people and led to a $566,000 fine for safety and health violations. It also pinched the West Coast’s supply of gasoline and contributed to several price spikes in California. In mid-July, even as oil was 50 percent cheaper than it was a year earlier, the average price of a gallon of regular gasoline across California was about $3.90, only a dime cheaper than it was in July 2014.

Refining outages have also raised prices in the Midwest, where the region’s largest refinery, owned by BP, cut back sharply because of leaks in its biggest crude processing unit found in July. BP’s refinery in Whiting, Ind., about 20 miles southeast of Chicago, accounts for 11 percent of all the fuel produced in the Midwest. The episode led to high prices at gas stations from southern Illinois up through Iowa and Minnesota. On Aug. 25, BP said the refinery is up and running.

Refiners without problems have been able to take advantage of high demand for gasoline. Despite the recent stock market selloff, a handful of big refining companies in the U.S. has enjoyed strong profits this year. Shares of Valero Energy and Tesoro, two of the biggest refining companies in the U.S., are up 19 percent and 23 percent, respectively, year to date. “The refiners have the upper hand,” says Fadel Gheit, an energy analyst at Oppenheimer. “They don’t have to give it away at the pump all at once. They can drag [gasoline prices] down at a much slower pace.”

When the kinks in the refinery network are worked out, even more gasoline may be produced, triggering a rapid and uniform price drop. “I think we may see $2 a gallon across a wide swath of the country by late 2015,” says Denton Cinquegrana, chief oil analyst at Oil Price Information Service.

Until then, the best place to find the cheap oil dividend may be in housing. Inexpensive gas has helped millions of Americans pay down debt. Consumer loan and mortgage payments as a share of after-tax income are at their lowest since at least 1980. The levels may have spurred recent housing construction and mortgage applications.

The bottom line: U.S. oil refineries have profited from processing cheap oil and passing only some of the savings to consumers.

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