Sunday, November 2, 2014

Are Lower Fuel Prices Acting Like an Economic Stimulant?

Fuel prices are heading downward to the merry of consumers and corporations alike. At the pump are some of the lowest prices we have experienced in over four years. Low fuel prices are not only helpful for families trying to balance their budgets but also businesses that benefit from lower costs of building, manufacturing, and distributing products. Low fuel prices could potentially have a positive influence on economic growth in many of the same ways as a stimulus.

Consumer Disposable Income: Fuel is an expense that families must pay in order to get to work, drive their kids to school events, or go to the grocery store. Families may cut back on traveling in lean years but generally rely on their automobiles for daily errands. When fuel prices decline the amount of money families must spend also declines creating greater disposable income for purchasing other products. 

Lower Business Costs: It costs companies to truck products from one location to the other. It also costs business to run lights, equipment, and other aspects of their operations. Lowering fuel prices also lower costs on everything that is included in the process of obtaining resources, manufacturing items and distributing. 

Acts as a stimulus: Lowering energy and fuel costs is one way to encourage businesses to grow and development. The rewards are exclusively held within the country even though international consumers reap benefits from cheaper American products. Just like interest rates encourages investment so does lower business costs that way on profit margins. 

A study by Aucott and Hall (2014) analyzed the effect of the price of fuel on GDP from 1950-2013. Their study included fossil fuels and nuclear ore on the growth of the economy. They found that the cost of energy has a significant impact on national growth. If the percent of GDP spent on fuels rises above 4% there are implications for slowing economic growth. 

Consumers may be happy with the lower gas prices but companies are also clicking their heels. The more their businesses are tied to the cost of fuel like the airline, manufacturing, and distribution industries the happier they are. Lower fuel costs act like a mild stimulate on the economy that encourages businesses to expand operations and consumers to get out of the house and spend. 

Aucott, M. & Hall, C. (2014). Does a change in price of fuel affect GDP growth? An examination of the U.S. data from 1950-2013. Energies, 7 (10).

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