The Significant and Understated Benefits of Energy Price Reductions to the US Economy

As the world economy appears to be lurching towards a recession, the energy economy is experiencing its own share of disruptive and confusing dynamics, with significant changes in prices and demand.  Since the middle of July, commodity prices began falling from their peaks, with baskets of commodities down approximately 50% from July, 2008, through October, 2008 based on a review of information provided by Bloomberg.  Similarly, oil prices also peaked in July, 2008, hitting $137 per barrel on a global basis.   Since that time, oil prices have fallen to close to $60 per barrel on the New York Mercantile Exchange futures market.  

The drop in oil prices has a number of important effects around the world.  Notably, here in the United Sates, consumers have seen retail prices for heating oil and gasoline drop as well, relieving the upward pressure on consumer finances that higher energy prices caused.  According the the Energy Information Agency, retail gasoline prices peaked in July at around $4.10 per gallon, and has since fallen to around $2.80 per gallon.  With each automobile owner driving 12,000 miles per year, and average automobile efficiency around 23 miles per gallon, this price reduction is putting an additional $650 in each driver's pocket, and approximately $1,240 per household.  This reduction also applies to heating oil savings for consumers, further relieving consumer burdens.

For the nation's economy, this reduction in prices helps reduce the country's balance of trade due to oil.  On an annual basis, at the July level of pricing, the annual outflow of expenditures on foreign oil was close to $650 billion per year.  At the October level of pricing, the annual out flow is estimated to $285 billion, a savings of $365 billion.  This benefits our countries balance of trade, which helps the value of the dollar, and reduces upward pressures on interest rates.  

For OPEC countries these significant downward adjustment in pricing has significant impacts.  First, revenues are reduced significantly.  For many OPEC countries, oil revenues are the life blood of their country, with national budgets set with assumptions about future pricing and production levels.  As prices go down, OPEC countries are under significant pressure to maintain revenues, by keeping prices and production up.   

These economic benefits associated with energy price reductions are beneficial to the United States economy, and will soften the economic blow that we are receiving associated with the economic meltdown, adding an additional $1 billion per day of spending power to the people of the United States.