Forget stocks, oil's fall is "overwhelmingly good news" for Americans
Oil prices failling again today. This as OPEC's Secretary General reiterates the oil producing organization will not cut production despite the current low prices and glut of supply coming out of the U.S. and elsewhere. That's leaving supply plentiful, prices low and consumption levels slowing. So who stands to benefit?
Cardiff Garcia, who writes for the Financial Times Alphaville blog says the low prices should benefit the middle class. “A big decline in oil and the falling gas prices essentially amounts to the same thing as real wage gain or a big tax cut. It’s coming exactly at the right time.” After getting beat up during the recession the middle class can use the help. Less money at the gas pump means more money deposited into their pockets. Armed with extra cash and fewer worries about gas prices consumers are shopping more and boosting retail sales.
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There are worries that the rapid pace and depth of the decline could signal a slowdown for growth prospects in the energy sector. Even if that’s the case, Garcia says it’s not all bad news: “It’s kind of a self-correcting mechanism. This is exactly the kind of response you do want to mitigate the fallout. Even the decline itself is a good thing.” The United States’ energy growth continues to accelerate but cheaper global prices could become problematic for other exporting nations.
The supply side shock could influence Fed policymakers, who will meet for the final time this week to decide on future interest rate policy. The slide in oil prices makes their decision more complicated, as output and inflation are moving in opposite directions. Garcia sees this as a chance for the Fed to keep rates low: “This is an opportunity to keep policy a little bit loose, for a little while longer. Until we do see signs that growth and inflation are getting back up towards target.” With oil prices down the energy sector will suffer but the cheap gas prices will also give the middle class a welcoming cash boost after years of declining incomes.
Not everyone thinks falling oil prices are a good thing. Citi Research, a division of Citigroup Global Markets, warns that cheap oil and surpluses could lessen the demand for U.S. exports. The firm also says the temporary economic boost from cheap gas may fool the markets and actually produce less benefits for consumers.
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