Where's the Cheap Oil Dividend?
The precipitous drop in oil prices poses a big question for the U.S. economy: Which force will prove more powerful, the potential end of the oil boom in some U.S. states, or the boost to consumers as lower energy prices free up spending money?
Although most economists assume the positives will outweigh the negatives, the early evidence is mixed.
The ascendance of the shale oil industry has had a significant impact. From the beginning of the U.S. recovery in mid-2009 through September 2014, just two shale-rich states -- Texas and North Dakota -- contributed more than 12 percent of all growth in personal income, increasing the national annual total by more than $67 billion in the last year alone. This, in turn, has helped fuel the consumer spending needed to get the U.S. out of the doldrums.
Now the effect on income appears to be waning. The most recent data from the Labor Department suggest that the decline in oil prices, which began in earnest in October of last year, is already having an effect on wages in the energy sector. Over the three months through December, the average hourly wage in mining and logging, a category that consists largely of oil extraction and related services, declined at an annualized rate of 5.8 percent, from $31.07 to $30.61 (see chart).
In principle, declining income from the oil sector should be more than offset by the huge "tax break" of lower energy costs. A one-dollar-per-gallon decline in the price of gasoline, for example, gives U.S. consumers about an added $130 billion per year to spend on other stuff. So far, though, there isn’t much evidence that they're taking the money to the mall. Over the three months through December, retail sales excluding gas stations rose at an annualized rate of 4.3 percent, slower than the 5-year average of 5.4 percent (see chart).
To be sure, it's early days, and saving rather than spending the oil windfall can improve consumers' financial health in the longer term. Still, there's no guarantee cheaper oil will help the U.S. achieve economic liftoff.
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