Sunday, June 3, 2012

Economy: With A Little Help From The Gas Station

Recent weeks were very disappointing for the global economy. The stock markets tanked world wide, U.S. job growth almost came to a deadlock, manufacturing in the U.S., China & India slowed down and the mess in Europe got worse. But there is one good piece of news which suggests that the global economy should pick up soon: Oil become much cheaper.

The U.S. oil price (represented by the future for WTI) fell 17% to $86 in May, the international price (Brent future) sank 15% to $102 (bloomberg). On Friday both futures dropped another 3%. Falling oil futures translate into sinking gas prices, especially in the U.S., just in time for the summer travel season.

The large drop of the energy costs means great relief for the global economy. Cheaper oil should work as an additional economic stimulus package. Companies have lower production costs and therefore higher profits, and consumers have more money to spend.

The current situation differs significantly from the summer of 2008. Then, the price of oil climbed to $147 even though the recession had already started. Expensive energy worsened the situation because it sucked a lot of money out of the economies of the U.S, Europe and Asia ( Many consumer with small budgets had to repond. And they did so by reducing their expenditures on consumer goods to pay for rising gas prices. Since then, U.S. oil became about 40% cheaper (Brent 30%) and is therefore much less of a drag.

It is not a coincidence that U.S. retailers reported solid sales number for May (reuters). It looks like the lower expenses at the gas pump compensate for the sluggish job market. I believe that the falling oil price could rekindle global economic growth and should induce a strong comeback of the stock markets driven by a rally of transportation companies and retailers.

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