WAYS FOR U.S.

When US petrol prices halved in the autumn of 2008 it was the most timely and effective consumer stimulus of the whole financial crisis. Now the price of filling up a car is dropping again, but the US oil industry has changed so much, the effects are not quite as clear-cut.

The shale oil revolution means that the US is no longer just the world's top oil consumer – and thus a beneficiary of falling prices – but the top producer as well. Now when West Texas Intermediate falls from $95 to $75 a barrel, as it did during the past few months, economists have to factor in the hit to producers.

Their broad conclusion is low oil prices will still have a large stimulative effect, helping the US and world economies through a sticky patch, but they could slow the growth of domestic oil production.

"The effect is hugely asymmetric in the short term," said Ian Shepherdson at Pantheon Macroeconomics in New York, because the boost to consumption is so direct, while the hit to producers is delayed. Consumer incomes "really are the be all and end all at this time of year", he said.

The numbers on how a fall in oil prices help US consumers are formidable. The country consumes around 135bn gallons of gasoline a year. The price is down about 20 per cent from $3.50 a gallon in the summer to $2.90 today.

Multiply the two together and it generates an annualised saving of about $80bn a year. That equals about 0.7 per cent of total US consumption, and it should show up in the fourth quarter as higher real incomes, which people can spend on something else. It is the equivalent of a large, unexpected and instant tax cut.

The consumption effect underpins fourth-quarter growth forecasts of an annualised 2.7 per cent – crucial to keeping the world economy on track at a time when Europe, Japan and some of the biggest emerging markets have stumbled.

On the other side of the ledger, the effects are more diffuse: lower oil prices will affect the profits, investment, tax payments and hiring of fossil fuel companies. After a remarkable surge, US crude oil production is up from 5.4m barrels a day in January 2010 to 8.6m barrels a day this August.

Annualised, $20-a-barrel off the oil price therefore amounts to $63bn less going into the pockets of US oil producers. Some of that will ultimately feed back to consumer incomes, through channels such as lower dividends from oil companies, or higher taxes because state governments get less in oil royalties.

The hit will take a long time to arrive, however; some of it will fall on foreign owners; and almost all will be borne by shareholders – such as rich individuals or savings vehicles – that consume little of their income.

A more immediate channel is investment in shale oil, but while the sector has grown rapidly, analysts at Goldman Sachs put the potential damage at no more than 0.1 per cent of gross domestic product in 2015, based on a 6 per cent decline in oil-related investment.

That could change if the oil price falls much further. "We are getting close to a threshold on oil prices that is too low to continue to support US production and exploration," said Diane Swonk at Mesirow Financial in Chicago.

But Ms Swonk notes that shale technology is still improving rapidly. "My contacts in the industry remind me that the threshold is a moving target and there is much to be done to squeeze costs out in the US," she says.

The US is rapidly becoming an oil power again, but for the foreseeable future, its gasoline-fuelled consumers will mean cheap oil amounts to a stimulus.

ft.com