Why It's Absurd To Call The Oil Price Drop A 'Free Tax Cut' For America

by: Logical Thought

Summary

The U.S. only imports approximately 1/3 of its oil.

That means 2/3 of American's oil cost is already being spent domestically.

If half the savings on the "imported 1/3" is reallocated to consumer products made overseas, the net benefit to U.S. GDP will be even smaller.

Many media and stock-pumping Wall Street bubbleheads-- perhaps most egregiously on CNBC-- have been calling the recent drop in gasoline prices the equivalent of an "economic stimulus tax cut" for U.S. consumers. In fact, the bulk of these savings-- even assuming that they're spent and not saved-- will simply reallocate revenue, jobs and profits from one domestic industry (energy) to others.

Seeing as the U.S. currently imports approximately just 1/3 of the oil it consumes, let's do some simple math:

Let's say the price of oil drops from $90 a barrel to $60, thus saving American consumers and industry $30/barrel. However, 2/3 of that savings ($20) comes right out of the pockets of the job-creating domestic oil industry...

...thus leaving only 1/3 ($10) as potentially net additive to U.S. GDP.

If we then assume that half of that remaining $10/barrel in savings is spent at retail stores on imported products and thus equally splits its beneficiaries between domestic retailers and overseas manufacturers, only $5 of the benefit winds up accruing to the U.S.

Thus, with just $5/barrel of $30 cheaper oil going to benefit U.S. companies and job creators on a net basis and with annual U.S. oil consumption at 19 billion barrels, the total annual "GDP boosting net benefit" to the U.S. from this so-called "tax cut" is probably only around $95 billion, a nearly meaningless amount of money relative to the $17 trillion U.S. GDP.

Additionally, this analysis assumes that none of the oil price savings is instead used for debt reduction by the egregiously overleveraged American consumer, nor does it account for the fact that lost U.S. oil industry jobs tend to be much higher paying than potentially gained retail and consumer services jobs. And of course I haven't covered the as-yet unknown ramifications of the massive defaults we'll soon see in the high-yield debt market thanks to overleveraged U.S. oil producers; that alone may completely offset the aforementioned $95 billion "net benefit" of lower oil prices.

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