2016: The Year of Oil (Craig Douglass On Consumers)

“Could be. Who knows? There’s something due any day. I will know right away, soon as it shows.”

Stephen Sondheim most likely didn’t have in mind the impact of oil prices on the American consumer when he wrote those lyrics to “Something’s Coming” from “West Side Story.” After all, in 1957, the year “West Side Story” debuted on Broadway, the price per barrel of oil was roughly $3. That’s $25.50 per barrel in 2015 dollars. Keep that figure in mind. It may be helpful later.

The “something” on which most economists are waiting is a significant increase in consumer spending based on the continuing decline in crude oil prices. So far, consumers have been saving increases in personal and disposable income created by an improving economy, little to no inflation and falling commodity prices, led by oil. While consumers’ disposable income has increased an average of four-tenths of 1 percent each of the past six months, consumption, or spending, has increased an average of two-tenths of 1 percent during the same period. The savings rate today as a percentage of disposable income is 5.6 percent, the highest in three years.

There are two major spending exceptions: Car sales are up dramatically (low oil prices have helped), setting new records in the past two months. New home sales, too, are on the increase in Arkansas and across the country.

But for the most part, consumers have not been participating in the economy as robustly as a job-and-income recovery would suggest. Is there pent-up demand for spending? If so, when are consumers going to start letting go of some of that cash?

We believe, based on a review of economic and political news, the economy will enjoy the benefits of consumer spending sooner rather than later. This notion is based on continued declines in oil prices. While we would like to see some modest increases in per-barrel prices that could ensure continued domestic exploration, production and an earnings recovery for energy-related companies, further declines may settle into a new normal.

For the new year, a confluence of oil-related realities suggests a pervasive impact on the economy in general, and consumer behavior in particular.

The worldwide economy is slowing, particularly China’s economy. While this means reduced demand for oil, inventories very well could remain high because of the productivity in oil production — more oil from fewer wells — and the consistent levels of production from OPEC countries in an attempt to protect market share. (Why would Saudi Arabia cut production in order to raise prices, thus helping American oil companies produce more and gain share? They wouldn’t.) Volume drives revenue.

The recent interest rate increase by the Federal Reserve, which adds to a stronger dollar, also puts downward pressure on oil prices, as we understand it.

Don’t forget about Iran. Iran is the fourth-largest oil producer in the world — behind Saudi Arabia, the U.S. and Russia, respectively — and is believed to have the second-largest proven reserves. As a result of the nuclear arms agreement with the Iranians, and the subsequent lifting of economic sanctions, upwards of 2 million additional barrels of oil may make it from Iran onto the world market by or before midyear. More supply coupled with falling demand equals lower prices.

While a volatile Middle East could cause instability in future foreign oil production, a prudent policy from oil-producing countries would be to continue production above consumption levels to ensure supply, thus mitigating any disruption in the flow. We believe that is part of the equation.

Now, remember our note about 1957’s $3 per barrel and the 2015 equivalent of $25.50? The relevance here is that some economists and commodity experts are predicting that oil prices could go as low as $20 per barrel. Really? That would be less than the price in 1957. And the economy in the 1950s was booming.

Consumers get it. If only peripherally. And if they were to perceive prices at the pump staying lower longer, their confidence just might allow a more open-wallet policy leading to a faster-growing economy. Our prediction. Is it possible?

Could be. Who knows?

Craig Douglass is an advertising agency owner and marketing and research consultant. He is president of Craig Douglass Communications Inc. of Little Rock. Email him at Craig@CraigDouglass.com.