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Cheap Gasoline to Fuel Black Friday?

As retailers across the U.S prepare themselves for this year’s Black Friday, most of them silently hope that this year’s consumer spending will be better than last year.

In 2014, the total in-store spending during Black Friday amounted $50.9 billion, a decline of around 11 percent from 2013’s figure of $57.4 billion. However, things could turn out to be quite different this year as most of the market analysts predict that the upcoming Black Friday will be a lot better than 2014’s in terms of consumer spending. After all, this year’s the massive collapse of oil prices has significantly reduced the part of income that U.S consumers pay at the pump. From $100 per barrel levels in 2014, oil prices are now hovering in the range of $40 per barrel levels. Would these gasoline savings made by U.S. consumers be spent this Black Friday? Or, will there be a drop in consumer spending just like 2014?

What analysts and economists have got wrong about cheap oil? Related: Oil Finds Some Support As WTI Hits $40 Mark

Most of the economists predicted that cheap oil would be highly beneficial for the end consumers as it would reduce gasoline prices and increase the disposable income of the consumers. In fact, the ABN Amro bank even predicted that a 40 percent reduction in the gasoline prices would increase the consumer disposable income by close to 1 percent of the U.S GDP. Although, ABN Amro was correct in its prediction of falling oil prices, it got one thing wrong. The consumers decided to save rather than spend! As data released by ABN Amro suggests, the consumer saving rate increased to 5.4 percent in the first quarter of 2015 from 4.6 percent in August, 2014.

Image Source   Related: Undeterred By Volatile Markets, Resource Investors Ramp Up Investments

The report concluded that although consumer saving rate started to decline after the first quarter of 2015, the overall consumer disposable income would only increase by around 0.6 percent in 2015. This is almost 40 percent less than what the bank had earlier predicted. From this data, it is pretty clear that although the disposable income has increased for U.S consumers, it is has not been in accordance with the fall in oil and gasoline prices as consumers have shown keenness in saving this disposable income.

What about the energy industry (investment) spending?

Most of the economists and trade pundits had earlier predicted that cheap oil would be catastrophic for U.S drillers and the U.S shale players who had high break even costs of more than $60 per barrel. Although some of the bankruptcies did take place, the overall effect on the U.S shale industry was not as bad as predicted earlier. The U.S rig count has fallen sharply along with the decline in energy spending, but the bankruptcies did not result in drillers abandoning their wells as was previously expected.

In fact, it only resulted in the acquisition of small and weaker companies by their much larger counterparts. Moreover, drilling companies are now becoming much more efficient and are reducing their production costs. Although ABM Amro reports the energy industry spending to reduce by 0.3 percent of the GDP, this slowdown in investment spending would be much more modest than predicted earlier. Related: Oil Prices Testing August Lows As Inventories Swell

Conclusion

Although most of the economists had expected cheap oil to increase consumer spending and reduce the energy industry spending, they were wrong on both aspects. The energy industry has proven to be resilient. Moreover, the U.S. economy is the richest and one of the most diversified, so the bust in the energy sector will barely show up in the GDP figures.

At the same time, the collapse in gasoline prices have not provided the jolt in consumer spending that many expected. Still, even though consumers are more keen to save rather than spend, the coming Black Friday might be slightly better for the retailers ( when compared to last year’s sales figure) and total consumer spending’s could well be in the range of $55 to $60 billion.

By Gaurav Agnihotri of Oilprice.com

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