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6 ways the oil price drop is great for the American economy

Justin Sullivan/Getty Images

Oil keeps getting cheaper, with a barrel costing about $30 less than it did three months ago. This is big news for the major oil producing countries, obviously, but it also has important — and dramatically positive — implications for the short-term American economic outlook. That's obvious if you're a heavy driver looking for some relief at the pump, but in truth the positive consequences are broad and widespread and the impact should be felt even by non-drivers.

Here are six ways cheaper oil is great news for the American economy.

1) Consumer spending will increase

Falling oil prices lead to lower gasoline prices, which leads commuters to have lower spending on fueling their cars. That leaves them with more money in their pockets to spend on other stuff. Studies of the impact of gasoline price increases tend to show a particularly marked impact on food spending. Higher gasoline prices meant less dining out and more food at home, and a shift in grocery purchases toward less expensive items. Cheaper gasoline should have the precise opposite effect.

Consumers will splurge more on their non-durable spending — buying pricier groceries and eating out more frequently. That's good news for grocers' and restauranteurs' profit margins, and it also means you should see more hiring in those sectors.

2) The job market will improve

In some times and places, a shift of consumer spending away from gasoline and toward other goods would simply lead to higher prices for those goods. But the American economy continues to exhibit a fair amount of labor market weakness, meaning that there is room for non-inflationary hiring. In other words, there are plenty of part-time workers out there eager for extra shifts and still a fair number of long-term unemployed looking for jobs.

With consumers paying less at the pump, they'll be demanding more locally produced goods and services and that demand will improve labor markets across the country.

3) Fuel-efficient car sales will decline

This doesn't necessarily make a ton of sense, but studies consistently show that consumers respond to short-term changes in gasoline prices by buying more or less fuel efficient vehicles. A 2009 study found that a $1 increase in gasoline prices boosts the market share of the most fuel-efficient new vehicles by 20%, while reducing the market share of the least-efficient vehicles by 24%.

A fall in gas prices should have the opposite effect.

This is bad news for Americans' lungs, but it's good news for GDP. For one thing, American car companies are relatively more specialized in gas guzzlers than are their Asian and German competitors. And a more subtle way this boosts the American economy is that many "foreign" cars are actually made in America these days, and that set of cars is also disproportionately tilted toward gas guzzlers. BMW, for example, makes all its X-series SUVs in Spartanburg, South Carolina but its sedans come from Europe. When Toyota sells a Prius to a North American customer, that car is made in Japan but when they sell an SUV or a truck it's made in Indiana or Texas.

4) Business profits will increase

So far we've mostly looked at how cheaper oil prices will improve the demand side of the economy by increasing sales of US-made goods and services. But cheap gasoline also improves the supply side of the economy. Suddenly every business that involves moving people (airlines, cab companies, buses) or goods (not just trucking and shipping directly, but all kinds of retail) has lower fuel costs and higher profits.

In some cases some of those profits will be passed on to consumers in the form of lower prices for things that aren't gasoline. In other cases, business owners will just pocket extra money. And in yet other cases, businesses will take advantage of lower costs to invest in increased production. Airlines might offer more flights, for example, as cheaper fuel makes previously unprofitable routes profitable again.

5) Oil boom areas will slow

There is one group for whom cheaper oil is bad news — oil producers, who've been having an amazing run between a combination of higher prices and surging American production. A 2013 Council on Foreign Relations report by Stephen Brown and Mine Yucel calculated the local job impact of rising oil prices, and we can flip their numbers to see the local impact of a price drop. The resulting map that I made above is probably a bit of an oversimplification, but it gives a good sense of the magnitudes involved. Long story short, it's good news for most places, but bad news for a few states.

And yet even here, the news is actually pretty good. Currently the unemployment rate in North Dakota is only 2.8 percent. In Midland, Texas at the center of that state's oil boom, it's 2.6 percent. In other words, employment should slow down the most in places where there are very few workers available to do jobs anyway. Oil boom areas have been experiencing rapid population growth, as job-seekers come to join the party. That trend will slow down or halt, but the people who would have moved to Bismarck in search of jobs will have an easier time finding them in Birmingham anyway so nobody has to suffer.

6) Most state budgets will improve

States normally tax retail sales on a percentage basis. If you buy $100 of stuff, you pay twice as much tax as if you'd only bought $50. One exception to that is gasoline, which is normally taxed on a per gallon basis rather than a per dollar basis. When gas prices fall, consumers spend less on gasoline but tend to actually buy more gallons. That means higher gasoline tax revenue.

At the same time, many of the savings at the pump will end up being spent on other stuff. That means higher sales tax revenue.

In major oil producing states, of course, this will be more than offset by declining direct revenues from the industry. But the vast majority of American states should see cheaper oil boosting their tax revenue without any tax rate increases. That will make it easier to keep tax rates and fees low, and or to hire new teachers and other workers.

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