Falling Oil Prices May Give US Economic Recovery Even Stronger Legs

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Woman Refueling
Woman refueling at pump.
Woman refueling at pump.
Woman refueling at pump.

For several quarters now, there has been a disconnect between the seemingly rosy statistics released by the government about an ongoing economic recovery and the reality most people feel on the ground. People don’t seem to have that much to rejoice about given the fact that medium household incomes are still below that of 2007 levels-one full year before the Great Recession of 2008. There are also those pesky reports of alarming numbers of Americans on food stamps (over 40 million!) and low labor force participation (the lowest in over 30 years).

 

Still, the ‘good news’ kept rolling in. After all, the Dow Jones’ seemingly unstoppable upward zoom recently continues to mint new millionaires at a fast clip. Add to this the white hot venture capital investment market in mobile-related technologies focused on the ‘sharing economy’ like uber and airbnb and it becomes too tempting to give in to the Dickensian take of today’s economy by vocal critics. On the one hand, Occupy Wall Street types are right to note that there is such a huge gap between the haves, the have nots, and the have a lots. On the other hand, conservative and free market critics of Obama make quite a bit of noise about the perception that the ‘good times’ on Wall Street have yet to seep to the level of Main Street. What gives?

Well, you can say good-bye to this seemingly schizophrenic economic picture. Thanks to crashing gasoline prices in the wake of the massive plunge in crude oil pricing, most Americans can now feel the economic good times directly-in the form of lower prices at the pump. As of this writing, the price of a gallon of American gasoline has fallen by 25 cents over the past two weeks. At this level, gas prices are at their lowest point in more than two years. And oil industry experts predict we haven’t seen the bottom of gas prices yet.

 

By some estimates, the global slashing of oil prices amount to a wealth transfer of over $1.2 Trillion dollars from from oil producers to consumers. If this trend persists, the much touted Great American Economic ‘Recovery’ might finally get stronger legs instead of merely being a wobbly government projection. Of course, it would take several quarters of back to back gas pump price softness for this petrodollar wealth transfer to translate to stronger performance for the US economy as a whole. Consumer spending needs to pick up a bit to spur stronger business spending and optimism.

As exciting as all these developments may seem, there is one key spoiler: the oil price war will not last past a certain price point-the average break even price of US shale oil. Once US shale oil stops putting downward pressure on OPEC oil, global petroleum prices might start creeping up again and endanger the US’ broad economic recovery at the consumer level. Let’s keep our fingers crossed for current trends to continue.

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