Falling Oil: The Giant Global Tax Cut

No doubt there is a lot of bad news out there but many hardly seem to notice one huge tailwind for the American and global economy. Oil prices have simply collapsed. 

In July, crude oil for New York delivery traded at more than $146 a barrel. Three months later, it has almost halved to $74. Some believe it could fall further still. The Financial Times reports that analysts at Goldman Sachs, who first predicted the price of crude could rise above $100, now believe it could drop as far as $50. 

This sharp fall in prices is akin to a giant global tax cut. Lower oil prices mean lower inflation, which leaves greater latitude to cut interest rates. It is also a boost for sagging consumer spending. In the second quarter of this year, US consumers spent almost 4 per cent of their personal income on fuel bills, some $440bn. The halving of the oil price since then implies a saving of $200bn. 

Tell Congress that we already have a stimulus package complements of lower oil prices. Of course the fall in prices will hit some countries and help others. Witness the carnage in Gulf markets (as predicted in my recent Forbes Asia column). The US economy is a major beneficiary, as are some emerging markets like China and India.

Comments

[GoldWize:]

Oil production is slowing because we're on the brink of peak oil. It's
okay to short this for now, but don't get caught long term short. Just
like in the seventies when we hit U.S. peak oil, there was a national
recession. Now, we've hit global peak oil. There has to be a world
recession, maybe even depression, to keep oil use at a sustainable
level. You know what that means. Less sushi, more Ramen.

2008 Oct 21 12:59 PM

[mangolfer:]

Peak oil = BS. Everybody, everywhere, is cutting back on fuel use and will continue to cut back. Good luck to all the oil bulls. The bulls have sh*t in their own pen and now have to sleep in it.....

2008 Oct 21 06:58 PM

[CLH:]

Strong language mangolfer, but you are right. Oil was a bubble at 100 and will fall to 50 (maybe over shoot to 30). It will be years before oil returns to 100.

2008 Oct 22 10:57 PM