The Oil Dividend

One of the few welcoming declines in this economy is the continued downward spiral of the price of oil. Crude oil prices have plunged from their highs of $140 a barrel this past summer to $42.14 a barrel for January - prices last week alone fell more than 25%, the biggest one-week decline since the Persian Gulf War in 1991.

As the economic picture worsens, lower energy prices fueled by oil may be one of the factors that help to cushion the fall for many tax payers. Diminished demand has translated into lower prices at the gas pump, acting as a natural tax cut for many Americans. The timing for this couldn’t have been better - lower oil prices will also mean that more Americans will be able to heat their homes as we head into the winter months.

In response, OPEC has signaled that it would most likely cut production of oil to stave off declining prices. OPEC group president Chakib Khelil told reporters last week that a "severe" cut may be needed to halt declining prices.

But Calculated Risk doesn’t see it that way. The economics and forecasting blog notes that oil prices are below Gulf Cooperation Countries (GCC) expenditures ($40 per barrel compared to $50 per barrel in government spending), making a talk of production cuts just what it is – talk. As an aside – there is some great material on this site, but be forewarned: if you’re looking for a Kudlowesque view of the economy you’d better look elsewhere.

Another effect of declining oil prices - it appears to lessen the demand for electric cars.