Saturday, October 25, 2008

The Oil Cushion

by Bill McBride on 10/25/2008 11:03:00 PM

How much will the decline in oil prices cushion the U.S. recession? That seems like a key question.

Here is an excerpt from Time: What's Behind (and Ahead for) the Plunging Price of Oil

If gasoline drops $1.50 the $900 [the average driver] saves would amount to a big stimulus package. According to Ed Leamer, director of the UCLA's Anderson Forecast, the current price slide could drop another $200-to-$250 billion into consumers' pockets, given that as of the second quarter personal spending for gas fuel oil and other energy was about $442 billion on an annualized basis.
The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Oil Cushion Click on graph for larger image in new window.

At current oil prices, it appears oil related PCE will fall to $300-$350 billion SAAR, from close to $500 billion SAAR in July. This is a savings of $12 to $15 billion per month compared to July. And that would be helpful and definitely provide some cushion for consumers. This might show up as more savings, as opposed to other consumption, but rebuilding savings is probably a necessary step towards rebuilding household balance sheets.

Data sources:
PCE from BEA underlying detail tables:
Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117.

Oil prices from EIA
U.S. Spot Prices.