Lower Oil Prices Equivalent to $300B Tax Cut

U.S. driving mileage is running 89 billion miles per year less now than it was a year ago according to analyst Mark Perry. The resulting savings in oil usage at 20 mpg and 43 gallons of gas per barrel of oil is a reduction of only 284,000 barrels per day due to less driving. That’s not nothing but measured against either the 21 mb/d of U.S. oil usage last year or the 85 mb/d of global use last year, it is not earth shaking. It represents only a 1.3% decline in total U.S. oil use. The total decline in U.S. oil use is running roughly 5% according to the EIA. So the difference must come from less driving plus a combination of less trucking, less industrial use of oil, and more efficient automobiles in the fleet. Or else the estimate of miles driven is still too high.

More interesting is Perry’s clearly accurate estimate that lower oil prices are saving U.S. consumers over $300B in gasoline costs, which is equivalent to a tax cut of that magnitude. The inverse effect, as I have written, was an effective tax increase caused by the increase in oil prices from 2004 - 2008. What is most interesting is that the higher oil price seems to have had little short term impact on GDP. The rise in oil prices certainly did not stop GDP from continuing to increase from 2004 - mid-2008. And it can be argued (correctly I think) that it was the credit crisis and housing crisis that brought U.S. GDP down in 2008, not the increase in oil prices.

So the bottom line implication, it seems to me, is that the direct impact of government actions to spur the economy can have only limited effect unless they are of astronomical amounts not being discussed, at least in the public press. Krugman recently argued in a similar vein that it will take a $600B spending program by the new Obama administration to have a real impact in spurring the economy. I think these “oil tax” numbers back up his assertion.

Probably the most important impact that a new Obama administration could have is on consumer psychology. If people begin to believe that a new government spending plan will bring the economy back to life, they may begin spending money themselves and acting like the recession is coming to an end. That, much more than government spending, would be likely to have a real impact toward growing GDP again.

Comments

[herbert hoover:]

Great. Now it costs less to go to a job I no longer have! I feel so much richer

2008 Nov 23 08:17 PM

[Greg Pinelli:]

Where to begin! First..the $300B in gas savings is certainly not like a "tax cut." Tax cuts run for definite periods of time..gasoline prices could go up faster than one can say "no new drilling"..anywhere.
Next..who in the world ever thought rising oil/gas prices were a detriment to GDP growth?? They are part and parcel OF GDP growth. More sales..more trucks..more gas/diesel! Duh.
Last..but certainly needn't be least..DO YOU REALLY THINK $600B IS A BIG DEAL?? They'll spend that and whatever it takes..and then there's plenty more where that came from.

2008 Nov 23 08:20 PM

[Jim Kingsdale:]

Yes I think $600 of stimulus spending and tax cuts is a big deal. If you don't, how do you explain that the numbers Congress has been tossing out are so much smaller?

An oil price increase is not like a tax increase in that it's continuation is not assured, that is true. But it is worse than a tax increase in its immediate macro economic impact in a Keynesian sense because not only is the money taken away from consumers but instead of it going to their government and thus providing some benefits as is the case with a tax increase, with an oil price increase 2/3rds of it goes out of the country and has zero economic benefit to the U.S.

You might want to stick to factual analysis - ad hominem accusations don't help anyone.

2008 Nov 23 11:55 PM

[Kunst:]

UGA: US gasoline ETF.

2008 Nov 24 02:13 AM

[john s. gordon:]

in 1933 FDR gave hope to a despondent population.

in 2009 mr. barack will give new hope to the citizens after 8 yrs of bush/cheney mismanagement?
> jack

2008 Nov 24 08:41 AM