In June 2014 things looked good for the oil industry. Oil had been floating above or around $100 per barrel for a long time. There was little concern that the global economy was in trouble; rather, the global economy was on the upswing. Then something happened.
The price of oil started to slip. And then it slipped some more. And then some more. Fortunately for oil producers, the price of oil appears to have hit somewhere near to bottom recently (at least that appears to be the majority of market participants’ opinions).
Oil Price Drop as a Tax Cut
Generally, analysts view the oil price drop as good for the U.S. economy. The thinking goes that a drop in the price of oil helps consumers more than it hurts the oil industry.
On the whole, economists think the oil price drop is somewhere around a $200 billion tax cut for American consumers and a $250 billion tax cut for European consumers.
Retail Sales and the Price of Oil
The theory that a drop in the price of oil acts as tax cut leads one to the obvious conclusion that the extra money consumers now have should show up somewhere else in the economy. Of all the places it could show up, on top if the list would most likely be Retail Sales since consumers typically spend their newly found money. Did it show up there? Here’s a look.
On the top is the price of oil from 2014 to the most recent 2015 price. As indicated, the price of oil peaked on June 19, 2014. The middle graphic is the year-over-year decline in the price of oil. The black liquid is down about 50 percent since peaking in June. The bottom graphic is what U.S. retail sales have done over the same time period as the oil price downturn. Surprisingly, there doesn’t appear to be a connection overall (with the exception of perhaps a slight bump in November).
Why is the Oil Tax Cut Not Showing Up in Retail Sales?
A couple of theories generally rule the debate. One possible explanation is that the spending is showing up in other areas of the economy, including savings and investment (you can check the numbers yourself, but this is a relatively weak explanation).
The second possible explanation is that consumers are spending the money on items that don’t show up (or show up with large, large error estimates) in retail sales, such as non-taxable purchases for such things as home repairs and online purchases (monthly estimates on this have very large error estimates).
Whether one or the other is correct, or neither of the above, one thing is for sure. The oil price tax cut hasn’t shown up in consumer spending yet.
Conclusion
Conventional wisdom has it that oil price drops act as tax cuts. Surprisingly, there’s little evidence that the oil tax cut is showing up in spending or overall economic growth.
The lack of any boost to consumer spending from what is supposedly a $200 billion tax cut in the U.S. and a $250 billion tax cut in Europe presents the concerning question – where is the money going if it’s not going towards retail sales? Interestingly, saving and investment presents lackluster evidence that the money went there.
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