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December 23, 2014 at 09:27 AM
If this year Christmas seems merrier, and Hanukah happier, the unexpected gift from Saudi Arabia last month in not cutting production amid an oil glut may have had something to do with it.
And if that gift keeps on giving—gas prices have now declined 88 straight days, the longest streak on record, according to the The Wall Street Journal—U.S. shale producers can also be thanked. The Journal reports that shale oil producers are facing a classic prisoners’ dilemma, each hurt by the oil glut but each waiting for its rivals to make the move.
If one’s competitors cut production, the firms still producing benefit from the resulting higher prices and diminished competition. They also avoid big risks that come with turning off the tap: “Cutting back on oil production would be risky for companies, which could lose market share, not to mention the cash they need to pay off debt and drill new wells.”
While oil producers are hurting, the decline in the price of oil to about half its $110 a barrel peak over the past five years, is like a shot in the arm for the global economy.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, told ThinkAdvisor in an interview that the oil price decline should result in expansion of global GDP.
“The IMF estimates that every 10% decline in oil prices equals a boost of 0.2-0.4% [in] global GDP over two years,” says Luschini, whose investment firm oversees $67 billion in assets. “Where oil rests today suggests [a boost of] 1-2% roughly or 0.5-1.0% next year. In addition, the five largest oil importers—the U.S., Euro area, China, Japan and India—will benefit from the cheaper price and collectively their economies represent 2/3 of world GDP.”
That GDP expansion derives from the net increase in consumer demand and takes into account the “negative” disinflationary impact the oil price plunge has on consumer spending.
“The [oil price] decline [will not] arrest disinflation as oil’s fall will actually contribute to it,” Luschini continues. “But core CPI should get a bump from increased consumer and business activity.”
Consumers’ ability to spend their income on Christmas gifts rather than gas at the pump has provided a nice holiday bonus for U.S. (and global) consumers.
Jason Pride and Casey Clark of Glenmede, a family-office-type firm and trust companywith $27 billion in assets under management, calculate that the reduced price of gas could amount to a 2% raise for the average consumer and significantly more for lower-income Americans for whom energy expenditures represent a higher proportion of spending.
