The growing gloom about the economy has pushed down oil and gasoline prices, along with the prices of an array of other commodities. And while that could mean more spending power for consumers, perhaps tempering any possible downturn, the steep drop in energy prices reflects worries that economic activity is headed in the wrong direction.
Mark Lennihan
Gas Pump
Since April, the price of the American benchmark crude oil has fallen by roughly $30 a barrel, with more than half the drop occurring in just the last two weeks.
On Monday, oil closed at $81.31 a barrel, down more than 6 percent. The decline in recent months is the most rapid in nearly three years, when oil and gasoline prices collapsed in response to the financial crisis.
As a result, drivers could see a gallon of regular gasoline selling for a national average of as little as $3.25 next month, a drop of more than 40 cents from current levels, according to economists.
While that will be helpful for many consumers, who recently were paying $4 a gallon in some states, the decline is a byproduct of “a pretty sick economy,” said Allen L. Sinai, chief global economist for Decision Economics, a consulting firm.
“Crude oil futures are economically sensitive, so the picture for us and the world economy is bleak,” Mr. Sinai said.
Still, lower oil and gas prices do provide a modest economic lift. Some economists compare them to a tax cut, since they put extra dollars in people’s pockets, offsetting a bit of the pain caused by a weak job market, soft home prices and evaporating investment portfolios. Falling fuel costs are especially good news for lower-income families, particularly in rural areas where people drive long distances.
The average household consumes 1,200 gallons of gasoline a year, which translates into a $120 annual savings for every dime shaved off the price of gas, according to Fred Rozell, director of retail pricing at the Oil Price Information Service.
“Everybody is helped when gasoline prices come down,” said Michael P. Niemira, chief economist for the International Council of Shopping Centers.
The rule of thumb of many economists is that every $10 drop in the price of a barrel of oil increases economic growth by 0.2 to 0.3 percentage point, although in the event of a broad economic slowdown, that increase is likely to be offset by other factors, such as cutbacks in consumer spending and business investment, economists say.
Lower energy prices bring down expenses for some businesses that are heavily dependent on oil, like airlines, freight delivery services and makers of plastics and fertilizers.
Michael C. Lynch, president of Strategic Energy and Economic Research, a consulting firm, estimated that the drop in oil prices over the last couple of weeks alone could translate into yearly savings of $13.5 billion for commercial truck fleets, $5 billion in savings for small trucks and local delivery fleets, $5 billion for domestic airlines and $1.4 billion for railroads.
Over all, the decline in oil prices since the spring, if it persists, could save the United States economy as much as $270 million a day in transportation costs, or almost $100 billion a year, according to researchers at the Oil Price Information Service.
Retailers like Wal-Mart and the dollar-store chains should particularly benefit, since they rely on customers whose ability to spend is tied to how much money is left after filling up their tanks.
“You’ll find a very, very significant correlation between the two,” William S. Simon, who oversees Wal-Mart’s United States business, said recently. “One goes up, the other goes down. One goes down, the other goes up.”
Auto executives say consumers will be more likely to buy larger vehicles when gas prices are lower, and prices on smaller cars could go down slightly.
Few consumers seem to be celebrating yet. Shoppers interviewed at a grocery store in downtown Houston on Thursday night, after the Dow fell more than 500 points, said they were more worried about their jobs and stock prices than the cost of a gallon of gas.
Ericka Schiche, a 40-year-old real estate agent, said: “If prices go down and stay down for a long time, it matters. But they’re saying there is going to be another recession, and the new recession may be longer than the last one.”
But for those looking for a silver lining to the cloudy outlook, lower gas and oil prices offer the prospects of some, albeit limited, relief.
“This will make it easier for the Federal Reserve to stay easier on rates and perhaps increase the size of its balance sheet — that is, to print more money” by buying assets, Mr. Sinai said. “Lower oil prices are an automatic response to the prospect of worse times, and in turn set up a counterforce against the possibility of recession.”
—Stephanie Clifford contributed reporting from New York, and Nick Bunkley from Detroit.