Oil Prices Plunge in August: A ‘Tax Cut’ for the American People

Oil is on track to record in August its biggest monthly price decline since May, as rising inventories and sluggish demand was posed to end -- or at least interrupt -- oil's vector to the stratosphere, a decline that will also benefit the U.S. economy.

Oil traded Wednesday at midday down 20 cents to $88.68 per barrel, and if crude closes roughly at that level it will have fallen about 10 percent in August, and down 20 percent from highs at/near $115 per barrel in May.

Further, the decline in the price of oil, if it holds, represents perhaps the best news for the U.S. economy this year, outside of the end of the period of large job layoffs by U.S. corporations.

The reason? Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every 1 cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.

Lower Oil, Gasoline Prices -- More Disposable Income

Hence, the decline in oil prices represents a de facto tax cut for the American people -- one most probably welcome, given stagnant incomes in many job classifications, and amid pinched budgets, due to rising living costs elsewhere.

Further, relief is starting to appear at the gas pump. Although there's a delay between the start of lower oil prices and lower prices at retail gas stations, motorists should continue to see falling gas prices, barring no major, new Middle East tension, or U.S. refinery problems, as the U.S. summer driving season comes to a close on Labor Day.

The average price of regular unleaded gasoline was $3.63 per gallon Wednesday, down about 35 cents or about 9 percent from May, according to data compiled by gasbuddy.com. A year ago, the average price was $2.69 per gallon.

Energy/Economic Analysis: A big cheer for declining oil prices, and here's hoping the trend holds. U.S. motorists, businesses, and the American people have had to endure a string of bad news, and the U.S. stock market's wild swings of August did little to help the aforementioned sleep well at night.

As noted, the substantial drop in oil/gasoline prices, if sustained, will increase consumers' disposable income and will help contain business' operating costs.

What's more, lower oil/gasoline prices, if they hold, will increase both U.S. GDP growth and job growth, and that also represents good news for President Barack Obama, from an electoral standpoint. Political science research indicates that American voters view the president as manager of the U.S. economy, and if the economy is doing well, that issue will work in his electoral favor.