A Drop In the Barrel- What Lower Oil Prices Mean for You

by Alexander Gillette

If you've operated a motor vehicle in the last 6 months, you may have noticed that it has become exponentially cheaper to keep your gas tank full. In fact, in many states around the nation consumers can find gas for under $2.00 per gallon; with two states (Missouri and Oklahoma) having gas under $1.80 (gasbuddy). So what has caused this, and what does it mean to investors?

Oil is a Casualty of a Price war

Why just some 2 years ago most consumers would be excited to see gas under $4.50 a gallon. But with US oil production at its highest levels in 30 years, and consumption dropping to 40-year-lows due to fuel efficient cars and a millennial generation that is moving towards mass transit and bicycles, the supply outweighs the demand for oil in the US (CNBC).

OPEC and Saudi Arabia along with the rest of the gulf countries are fighting to hold their market share, resulting in a price war that has seen prices fall dramatically. It is a free-for-all, with each country undercutting its neighbor in an effort to gobble up the non-US global market share (Asia in particular).

More money in consumers’ pockets

According to gasbuddy.com, consumers are saving $300 million/day compared to gas prices last year. Consumers should see that as a tax break, found money if you will. This means more money to spend at stores, on vacations (driving to, not flying), and on other discretionary items.

Oil stocks

One thing is for certain: as the price of oil is being pushed down, companies’ margins are being hurt and are eating into company profits. As a result, most oil and energy stocks are feeling the pinch. For example, the United States Oil ETF (USO), an exchange traded fund which invests in the spot price of West Texas light sweet crude has traded down almost 45% over the last 3 months. A continued downward trend in oil prices, while good for consumers, may hurt investors who are long these types of energy stocks. Keep an eye out for downgrades and cuts in outlook in the coming weeks in an effort to stabilize the drop in oil prices and create a bottom. As for now, investors should be cautious until the price of oil stabilizes.