About Cheap Oil as a Christmas Present

The economics, business, and media worlds are gushing (couldn’t resist the pun!) with predictions that dramatic recent cuts in oil prices will give American consumers and the economy as a whole a big Christmas present. The reasoning: With lots of money freed up to spend on other goods, the nation will be handed the equivalent of a big tax cut, and the resulting higher consumption will boost the gross domestic product (GDP).

A Scrooge-like “Bah, humbug!” is too strong a reaction to these claims. But a quick review of how spending affects growth, and a look at the actual numbers, show that lots of skepticism is in order.

The notion that spending creates output (and therefore growth) seems as obvious as it is appealing – especially in the consumption-heavy U.S. economy. But it’s woefully incomplete. What’s important for Americans is that what creates output (and therefore jobs) in the United States is spending on goods and services originating in the United States. Spending on imports creates output, too – but in the country they come from, not in America.

(Some analysts claim that imports create U.S. output and employment, too, because they generate activity in transportation, warehousing, wholesaling, and retailing. But that’s a bogus argument because domestically produced goods and services generate this activity, too – and it comes on top of the production-generated output that imports can’t provide.)

So it should start getting obvious why the oil price bonanza’s effects are likely to be a significant disappointment. Let’s take the impact on holiday shopping. Although I haven’t looked at the data in recent years, I have found lots of evidence supporting what most of us know intuitively – that the overwhelming share of the Christmas and Hannukah presents we buy are made overseas. While researching this article for The Christian Science Monitor, I discovered that in 2009, between 95 percent and 99 percent of all American purchases of such popular gift items as most games and toys, gloves and mittens, athletic wear, and women’s and girls’ coats were imported. Import shares were somewhat lower, but still dominant, for products like men’s and boy’s coats, neckties and scarves, and power-driven hand-tools.

Those calculations couldn’t be performed for 2011, when the article was published, but data was available showing that imports as such for Christmas goods categories had risen 5.8 percent that year – considerably faster than overall economic growth. Similarly, I don’t yet have the Christmas goods-specific numbers for this year so far, but all consumer goods imports (and this category excludes food) are up 3.94 percent this year.

That’s actually slightly slower than the 4.08 percent gross domestic product growth registered so far this year (all these figures are pre-inflation). But it’s still inconceivable that American-made gift items have boosted their market share much – even with the kind of manufacturing renaissance that manifestly has not taken place. Bottom line: An oil-produced windfall for holiday shoppers as such won’t redound much to America’s benefit.

But there’s one more short-term complication. Lots of the petroleum used in the United States is imported, too – 33 percent last year, according to the U.S. Energy Information Administration. So far this year, oil imports are down 8.36 percent, which is great from both an economic growth and a national security standpoint. This development, too, however, muddies the economy bonanza story. For it means that, whereas in years past, fewer consumer dollars spent on imported oil could have mainly translated into more dollars spent on other imports (Christmas gifts), now fewer dollars spent on oil will mean fewer dollars spent on something that is increasingly Made in America. So in this sense, the oil price windfall could in theory actually subtract from the economy.

Not that the effects of lower oil prices on the American economy will be confined to the trade-off with other consumer spending, even beyond the holidays. Oil powers much of the country’s industry and provides vast quantities of chemical feedstocks, too.  The energy revolution is also responsible for a growing share of production growth itself (which means that workers in the energy complex itself may take a job or wage hit, too). At the same time, simply by reducing imports and therefore the nation’s trade deficit, cheaper oil has already juiced growth and should continue curbing the shortfall.  Moreover, the price of oil, its inevitable fluctuations, and the equally inevitable lag in their impact, mean that the story will play out with plenty of ups and downs over time.

It’s not even clear that consumers will spend all or even most of their oil windfall, as opposed to saving it – over any timeframe. What does seem clear is that believing in oil to supercharge the holiday shopping season is about as reasonable as believing in Santa Claus.