Longterm, the price of oil can have an impact on everything from climate change to geopolitical conflicts. Short term, however, the price of oil can act like a national tax increase or decrease that can have a direct impact on your business. Here’s how.
You don’t need to be an economist to know that when the price of oil drops, money shifts from the pockets of oil companies to those who use oil in the form of gasoline or over 6,000 other products it is used in, ranging from toothpaste to motorcycle helmets. Lower the price of oil and it’s like a short-term tax cut–or economic stimulus. Increase the price of oil and it’s like a tax increase.
The price of a barrel of oil can be a small business economic indicator
(These charts show the matching trend lines of the past year’s prices of crude oil futures (left) and gasoline. Source: Nasdaq.com)
While there are thousands of small businesses in the U.S. that are part of the eco-system of oil and gas production that may be negatively impacted by lower prices, for the vast majority of consumer-oriented small businesses, a lower price of gasoline at the pump means more money in your customers’ pockets.
For example, according to a report released by Morgan Stanley earlier this month (October, 2014), the lower price of gasoline at the pump will add $40 billion (when compared to last year) to the household incomes during the fourth quarter, alone.
Falling prices of gasoline have more immediate impact than rising
Rising oil prices are a double-whammy on the economy. First, when energy prices rise households and businesses immediately have to pay the new costs, effectively a tax on consumption. The energy producers don’t cycle that money back into the economy as quickly as the people spending it. According to economists, since higher prices mean higher inflation, that extra spending doesn’t contribute to real GDP growth. Add all those effects together and a $5 increase in the price of oil translates to about a 0.1 percent hit to gross domestic product.
On the other hand, falling gasoline prices are felt immediately by consumers. If a tank of gas cost $75 last month and $50 this month, it will likely be cycled back into the economy–and you hope, your business.
Early indicators of oil-related economic fluxuations anyone can follow
A general rule of thumb suggests that an increase or decrease of $10 in the price of a barrel of oil leads to an increase or decrease of 25 cents a gallon in the price of gas. Watching the trending (not the day-by-day gyration) price of oil futures can enable you to skip all of the punditry related to oil prices that is intended for those who make their money by trading commodities. Also, the website GasBuddy.com is filled with charts, including a “heat map” interactive display of pump prices of gasoline, that make watching the price of gas feel like a weather report.