Low prices of gas and oil are creating a reallocation of wealth not seen very often in capitalism. The recent version of the Beige Book from the Federal Reserve Bank gives some clues about the way this phenomenon is evolving. This short article looks at the winners and losers of the current oil story.
The rearrangement of resources from current gas prices has consumers happy while big oil corporation worry. With record-low prices of oil, the petroleum industry began to cut back capital spending as well as to layoff employees. It is worth noting that although oil companies are certainly wealthy, analysts should look for risks in debt default as well as significant labor layoffs from those companies. As new projects halted within the industry, thousands of companies have started already to cut jobs (Mining Industry has shed 171,000 workers since September 2014).
It is too early to establish to what extent those layoffs could spill over the economy, as well as in what ways it could do so. The obvious externality is defaulting on mortgages, credit cards, and loans payments, among others. Otherwise, it could also be argued that the size of the sector is not even half of others such as the financial sector. However, what could stand out is the leverage ratio of those layoff employees as their salaries compare high against other similar professionals.
Prices are fostering an economic adjustment all over the economy:
In spite of the layoffs, low gas prices are fueling economic growth on other fronts. Tourism is one sector that has benefited from low gas prices since people travel longer and more often nowadays. Notably, Atlanta in this version of the Beige Book reported that due to gas prices tourism has increased considerably.
Along with increasing trends in tourism, there has been an interesting shift in sales of automobiles. Apparently, automobile customers are opting for bigger engines and trucks as gas prices allow them to fill up the gas tank quickly. Choosing light trucks seem fashionable nowadays even if they are driven for delivering pizzas. Clients of the automobile industry seem confident that gas prices will not increase shortly.
Low oil prices are fostering an economic adjustment all over the economy. The fact that gas station prices average U$ 1.74 (Regular) has meant cheaper connectivity for business. The latter is another good aspect of low gas prices from which many companies are benefiting from either lowering costs or increasing consumer spending. Production costs in transportation have meant increasing margins of profit for businesses that employ resources in mobilizing goods.
Many economic transformations go unnoticed since they take place over the extended periods of time. Not very often can analysts see economic changes like the one that low prices in oil is shaping. Combined with government policies that put in place financial incentives for the development of clean energy, fossil-based combustion products have seen a rapid deceleration that has created winners and losers at the same time.