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4 Jan 30 2015 @ 11:43am by Matt Smith in Crude Oil, Economy, risk management

Chuck Bucks!

The price drop we have seen at the pump in recent months has been nothing short of spectacular. It has provided the equivalent of a huge tax cut to the US consumer, considerably boosting disposable income (chuck bucks!*). But as my fellow countryman Geoffrey Chaucer said some 640 years ago, all good things must come to an end. So as retail gasoline prices begin their seasonal ascent, let us assess the impact of their precipitous plunge, and what it means looking ahead: 

First up, let us take a look at recent action. US retail gasoline prices have fallen for 123 consecutive days, dropping 45% from the highs of late June to $2.03/gal in recent days. Usually we see a much lesser drop of 15 – 20% through the end of each year. Granted, the 45% drop in retail gas prices this time around has been overwhelming due to a ~60% drop in oil, leading retail gasoline prices to a level not seen since early 2009 – when oil prices were last sub-$50:

Let us not dwell at this time on the detrimental impact of falling oil prices on the US oil and gas sector; that is a topic for another time. Let us focus instead on what such a drop in gasoline means for the US consumer. Before even digging into the numbers, the impact on sentiment is clear to see, for the plunge at the pump has correspondingly given US consumers a profound sense of well-being (through the medium of chuck bucks), pushing consumer confidence to an 11-year high:

If we then dig into the numbers, the benefit of lower prices has really ramped up in recent months. From July to November, the average benefit over the five month period was only 15 cents per gallon. But since the start of December to present,  that year-over-year benefit has skyrocketed to average close to a dollar.

If we see gasoline prices average ~$2.30/gallon this year (as the EIA currently projects), that would be a dollar above the 2014 average of ~$3.30/gallon. If we do the fuzzy math (as I did here), a $1/gallon saving on daily gasoline demand of 9 million barrels a day equates to ~$400 million per day. Extrapolate that across a year and we’re looking at nigh on ~$150 billion of chuck bucks back in the pockets of US consumers (and that’s without taking into account the savings involved in diesel).

As with everything in life, there are winners and losers, and the situation with gasoline prices is no different. Restaurants and bars are already experiencing the best sales growth in years, with restaurant sales projected to grow by $26 billion in 2015, or 3.8%, in no small part driven by more chuck bucks. The American Banking Association (ABA) also reported that bank card delinquencies are hovering close to 15-year lows, while loan delinquencies are at a record low as debt is paid down. US economic growth as a whole continues to be driven on by consumer spending. While growth in Q4 last year was just revised down to +2.6% (from +5%) due to lower business investment, consumer spending, which accounts for ~70% of the economy, grew at 4.3%, the fastest pace since 2006.

As for the negatives, the most obvious is that low oil prices threaten clean energy investment. While the price drop is unlikely to impact solar and wind power development, it is likely to dent hybrid and plug in vehicle sales. While US vehicle sales are expected to see their highest January sales in eight years, we are already seeing increasing sales of SUVs and gas guzzlers. (To which President Obama yelled ‘don’t do it!’).

Public transport is also bracing itself for a drop in use. As the chart here shows, ridership has risen strongly in the last few decades, but could come under pressure from a combination of the free-fall in fuel prices and limited funding for public-transit projects going forward.

We are now at the lowest ebb of retail gasoline prices. As Mr. Chaucer said, all good things must come to an end, and prices will gradually rise through the coming quarter and beyond. That said, the strong likelihood that prices will average a dollar less per gallon than last year is an exceedingly positive development for the US consumer…and their chuck bucks.

*Many years ago I saw Frank Black (from The Pixies) play a solo set in London. He was on his way to vacation in Scotland, and stopped in London to earn himself some spending money for his trip. ‘Chuck bucks’, he chortled.

4 Comments on this post:

  1. Claude Desormiers says:

    Great post!
    Although we see a trend toward an immediate consumer benefit of the lower price of barrel and consequently at the pump, alternative fuel and the general population behavior are well entrenched to continue the transition to clean energy!

    The immediate impact raises the concern with the continued investment required to ensure available supply-fueling station infrastructure, while the AFC/EV manufacture increases the number of alternatives vehicles offered to customers.

    The “Chuck Bucks” that the barrel effect has on customer immediate spending capabilities is real, it will be interesting the mid-term impact on consumer goods!
    Money in the pocket of the population, increase spending power and encourages a diversified economy!

    But for one— for frequent flyers – will the “fuel surcharge” be a saving on the airline ticket? What about all the other fuel surcharges?

  2. Matt says:

    Is there any indication that consumers are choosing to save their money for perceived harder times to come?

  3. Matt Smith says:

    Claude – thanks for your thoughts! The US is by far the biggest beneficiary of low oil prices, given how much oil it consumes and imports. Europe, however, is seeing a much lesser benefit given the weakness in the euro (to offset the oil price drop) and the high percentage that taxes account for in the total fuel cost.

    As for airlines, they were getting ‘bums on seats’ at elevated oil prices; they are not incentivized to cut flight prices when strong demand is present already – it would be altruistic, not economic for their business (economics always win through in big business). Other fuel surcharges (such as for trucking) will be much more negotiable, however.

  4. Matt Smith says:

    Matt – awesomely, awesome point. A piece appeared in the Wall Street Journal just yesterday, which in part endorsed my argument, and in part expanded upon it. The piece said that consumers are being frugal, and ‘hanging onto roughly half of their gasoline savings. Another 25% is being used to reduce debt, while the rest is being spent on small purchases like groceries, clothing and fast food’. So in response to your question, it’s a bit of both. Full article here –

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