The Power of Lower Oil Prices
By: Dr. Charles Lieberman
Date: 11/17/2008
The seemingly endless decline in oil prices is very welcome, after its surge in the first half of the year. Reduced energy costs leave more dollars in consumer wallets. This week's CPI report, which will show a sizeable decline, implies a strong gain in real household income, even as household outlays weakened dramatically. Understandably, consumers have turned cautious amid all the turmoil in the markets and the sharp rise in unemployment. But the growth in real disposable income will allow consumers to unleash spending once nerves calm down.
Real personal income has improved very little this year, except for May, when tax rebates provided an artificial, but temporary, boost to consumer incomes. That May gain of more than $450 billion at an annual rate was preceded and followed by weakness that offset most of the growth in income earned all year. That lack of growth in real income was largely the result of the surge in crude oil prices, of course. In effect, much of the growth in nominal income was used to pay for the higher cost of energy, leaving little for increased spending on anything else.
Crude oil prices peaked in mid-July above $145 and have fallen below $60, a dramatic decline that will take some months to be fully reflected in consumer prices. Locally in New Jersey, regular gasoline now sells for less than $2.00 per gallon. The latest price declines at the retail level will not show up in consumer price index measures until the December report, which will be released in mid-January. The indirect price effects, such as airline fares, will take even longer to show up fully.
If the average car uses about 500 gallons annually (10,000 miles at 20 miles per gallon), a decline in gas prices of $2 implies $2,000 in savings for the typical two-car family. With household income around $50,000, that's a 4% boost in real income just from gasoline prices! Households will also benefit from lower oil and natural gas heating costs. Indirect benefits are worth nearly as much as the direct benefits, although these take longer to flow through all the way to consumer prices. So within just four months, households have gained a huge boost to spendable income. Moreover, consumers everywhere around the world will benefit from this gain in real disposable income, which can help improve growth globally. In the U.S., the price decline will show up dramatically with this week's CPI report. The spending increases will follow, once confidence improves, most likely by early 2009. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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