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Cheap Oil May Be Economic Stimulus

Ebb and flow of markets may provide relief people seek

By Mark Huffman
ConsumerAffairs.com

November 24, 2008

Personal Finance • Staying Healthy in a Sick Economy • Consumer Confidence Sinks to Historic Low • How Retirees Can Survive the Bear Market • Are Men Hardwired to Overspend? • Shopping Poll Holds Bad News for Retailers • 533,000 Jobs Lost in November • Feds Report More Signs of Recession • Consumer Confidence Rebounds in November • Cheap Oil May Be Economic Stimulus • Job Security Lacking This Holiday Season • An Upside to the Down Market: A Lower Tax Bill • Americans Tap Savings to Cope with Economy • Economists' Panel Sees Prolonged Recession --- • More Personal Finance News

Talk is intensifying in Washington about the need for an economic stimulus package early in the Obama Administration, to help lift the country about of its economic plunge. But economics, itself, has already delivered something of an economic stimulus, without the Treasury Department having to write a single check.

Since August oil prices have been falling, and the price decline was speeded up by September's credit crisis. A barrel of oil has fallen from just over $147 in July to below $50 last week.

As oil has plunged, so has the price of gasoline at the pump. Motorists who had grown accustomed to spending $75 or more to fill their tanks are now doing so for $40 or less. The difference stays into their pockets.

The national average for regular gasoline has now dropped more than $2 per gallon since this summer, when it reached $4.11 per gallon. And that $2 drop in gasoline prices since this summer roughly equals a $240 billion tax cut for consumers, according to economists.

Oil speculators bid up the price of oil in the first half of the year because they thought booming economies in India and China would keep demand high no longer think that way. They've been selling oil contracts since August and some analysts predict prices could go even lower. And as oil goes lower, so does gasoline. The current national average price of unleaded regulation is well below $2 a gallon.

Lower fuel costs are having another beneficial impact on consumers. Airline tickets, which soared on rising jet fuel costs, are falling now that fuel costs are coming down. The average airline ticket was down nearly five percent in the last month, according to the U.S. Bureau of Labor Statistics.

Economists say food costs are still high, but that they too could ease a bit when cheaper transportation costs begin to filter through the system.

Of course, this cheaper gasoline comes at a pretty steep price. The economic disruption that's pushing prices lower will also costs many people their jobs. It's already eaten away at equity in their homes and in the value of their stock portfolios.

Still, economists say it is a mitigating factor that keeps the economic pain from being even worse, and might be prove helpful to eventually turning the economy around. When that happens, consumers had better be prepared to start paying $3 and $4 a gallon for gas again, since oil prices will be certain to resume their climb.

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