How Will an Oil Price Drop Impact Consumers at the Pump and Beyond?
Oil prices recently plunged after Russia and the Organization of Petroleum Exporters (OPEC) failed to agree to a reduction in production even as concerns about the effects of the coronavirus causing COVID-19 are felt globally. In retaliation for the rift, Saudi Arabia, the second-largest producer of oil behind the U.S., cut its price, shocking financial markets. But does an oil price drop impact gas prices at the pump for consumers?
The short answer is yes. The long answer is more complicated. The price of oil and the price of gasoline are closely correlated since gas is made from oil. But it takes about six weeks for gas prices to reflect a change in oil prices. However, individual gas stations set the price per gallon, so there can be wide variations in prices well within that six-week window.
On a global scale, for the last three years, OPEC and Russia have coordinated production of oil with a goal of controlling global markets and crippling the U.S.’s surging shale oil industry. But to the dismay of the OPEC-Russia cooperation, the shale industry hasn’t gone bankrupt. Instead, in 2018, the U.S. became the largest producer of oil in the world and a net oil exporter, meaning it ships out more oil than it ships in. As a result, the OPEC-Russia alliance turned to China to meet its growing demand for energy even as the U.S. continued pumping out the shale version of black gold.
But with Asia’s energy demand declining due to the coronavirus outbreak, oil is flooding the market and prices are plummeting, which is why OPEC asked its members and Russia (an ally but not an OPEC participant) to cut production. With Russia’s refusal to cooperate, Saudi Arabia retaliated by dramatically cutting its price, sending crude oil markets off a cliff not seen since 1991. The U.S. also exports to Asia, so American oil producers are feeling the effects of weakening demand and prices for shale oil are falling as well, so gas prices won’t be far behind.
Typically, lower energy prices are good for consumers, putting more money in wallets to spend elsewhere. But since the root of the lower prices is an overall deceleration in the global economy while everyone’s holed up fearing the coronavirus, the savings benefits may not be realized in more spending. Instead, insecurity and trepidation may lead to stockpiling of cash as consumers stay close to home, travel plans are cancelled, and large festivals and conferences are nixed.
In particular, slowing consumer demand for discretionary outlays negatively impacts service industry and gig economy workers such as restaurants, hotels, conference centers, and related vendors across a wide swath of any economy. Households may also feel the impact of a crippled stock market with lower projections in salaries, bonuses, commissions, and even job losses.
The bottom line is any savings from lower energy prices – including heating oil and propane – may be washed away in lost income and stock market forfeitures as the global economy bears the brunt of the coronavirus epidemic.