Oil prices have recently plunged to their lowest level in four years. While that's creating losers out of oil companies and OPEC, there is one big winner when oil prices plunge: you. Here is why you are the big beneficiary of plummeting oil prices.
Source: U.S. Energy Information Agency.
You're $500 richer
The price of oil makes up the nearly two-thirds of the price of gas. So, when oil prices plummet you obviously win because gas prices follow suit. In fact, thanks to oil's most recent plunge, gas prices are at the lowest point in more than three-and-a-half years according to AAA. Most of us are paying between $5 and $15 less to fill up our gas tanks than we were spending earlier this summer.
In fact, gas prices are down about $0.50 per gallon since peaking in April. So, given that the average American household uses around 1,000 gallons of gas per year, saving $0.50 per gallon for a whole year would save households more than $500 over the course of a year. Add it up and Americans are spending $230 million less per day on gasoline. That's a big win for our economy as it is providing each of us a little bit more flexibility in our budgets.
But the winnings extend well past the pump
Overall, oil prices are off about 20% from the average price over the past three years. Not only is that saving American consumers money at the pump, but it's saving the global economy about $1.8 billion per day. If oil prices simply stay at the current level of around $80 per barrel for the next year it would act as a $1.1 trillion economic stimulus for the global economy according to an analysis from Citigroup (C 1.41%). This will result in the growth rate of the global economy picking up steam, with analysts now estimating 2.98% growth over next year, the fastest rate since 2010 according to Bloomberg.
Source: Philips 66
However, this boost isn't just coming from savings at the pump. Only 46% of the oil used in the U.S. is turned into gasoline. The rest of that oil is used to make everything from jet fuel and home heating oil to waxes and plastics. Because of this, oil touches our lives and our wallets more than just at the gas station. So, falling oil prices will make petroleum based products cheaper, as well as cut the energy costs of manufacturers and shipping companies, which could save consumers even more money in the long run. This savings might not be as noticeable as what we're paying at the pump each week, but its impact is just as great if not greater.
Your opportunities expand too
With $5 to $15 saying in your pocket each week instead of being used to fill your gas tank and additional savings coming down the road from cheaper petroleum-based products, you have the opportunity to do more with your hard earned money. With an extra 50 bucks in our pockets each month we can go out to eat a bit more often or maybe to a nicer restaurant. Or, we could put it toward another purchase we'd been putting off for a while. Even better, this extra cash is coming at a time when we could use a little extra due to the looming holiday season.
However, in addition to giving us all some extra holiday spending money, the plummet in oil prices is providing us with choices that go well beyond just spending it on something else. We could use some of the savings to also pay down debt or even fill up our savings and retirement accounts. These choices could really make a difference. For example, putting an extra $50 a month into a retirement account earning 7% per year, and maintaining the discipline for a quarter century, would lead to the accumulation of nearly $35,000 extra for retirement. These are choice that could vastly improve our financial lot in life.
So, what will you do with your extra?
You are the big winner from falling oil prices. It's leaving a little extra cash in your pocket every time you fill up and will save you even more money as the price for other petroleum based products begin to fall. You can use this extra spending money to go out to eat or even provide a nicer Christmas for your family. Or, you could turn your savings at the pump into a real windfall when you are ready to retire by pumping the excess cash into your retirement account. No matter which choice you make, you still come out ahead thanks to the plummet in oil prices.
