Oil prices fell to multi-year lows through 2014 while bottoming out in dramatic fashion through the end of the year. During this time, talking heads debated the merits of falling oil prices as the markets seemed confused. Although there are slight negatives to low oil prices, it is resoundingly good for the U.S. economy.
Consumers are king in driving the U.S. Gross Domestic Product and the economy. The simple economics of lower gas prices mean more money in the pockets of Americans which translates into more money to spend. The direct effect is greater spending which helps the U.S. economy, GDP, and drives business. According to a recent article in the Washington Post, “Every day, American motorists are saving $630 million on gasoline compared with what they paid at June (2014) prices, and they would get a $230 billion windfall if prices were to stay this low for a year.” If Congress were to implement tax breaks for this amount, investors would not be able to get money into stocks fast enough. However, the media continues to debate the merits of low oil prices.
The indirect effect to the American economy is to businesses. Low oil prices make “widgets” cheaper to produce, store, and transport to the consumer. This raises margins which increases profits which leading to increased employment.
The positive direct and indirect effect of low oil prices on the U.S. economy far outweighs the negative effects of low oil prices. The net result of low oil prices is lower revenue in the energy sector which has the potential to lead to lower profitability and layoffs in the energy sector.
In addition, emerging markets stocks of countries with economies that rely heavily on oil production may also see decreases in net margins.