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Should We Fear - Or Cheer - Lower Oil Prices?

March 1, 2016

 

 

Chances are you've been celebrating lower gas prices.

 

Despite creeping up for the first three weeks in February, AAA reports that the national average price of gas is $2.28 today, which is still the lowest since December 2009.

 

The result: an estimated $70 billion in direct savings for U.S. consumers over the next 12 months. At previous prices, the average American was spending about

$2,600 a year on gasoline, so the 20% price decline would result in $520 more to save or spend.

 

It gets better.

 

Even though gas prices (and, therefore, the cost of driving) have plummeted, the Internal Revenue Service is raising the standard mileage rates that people can deduct on their tax return for business travel, from 56 cents in 2014 to 57.5 cents per business mile driven next year.

 

While U.S. consumers are cheering the decline in oil prices, and non-energy producing nations like Japan and countries in the Eurozone are seeing a boost in their economies, who's NOT celebrating?

 

As it turns out, some of the biggest losers are American domestic shale oil producers, who basically break even when oil prices are at their current $50-$60 a barrel levels. Any further drop in prices would slow down domestic energy production, and probably create a floor that would keep prices from falling much further.

 

Another big loser is the socialist government in Venezuela (remember Hugo Chavez?), which needs oil prices above $162 a barrel to pay for all of its social programs. Iran is in a similar situation. They reportedly need oil prices to move up to $135 barrel to stay in the black, due to continuing sanctions from the world community over its nuclear program, and the high cost of supporting Hezbollah and its own military ventures in the Middle East.

 

The biggest loser is probably Russia, which requires oil prices of at least $100 a barrel for its budget to withstand international sanctions and finance its own military adventures against neighboring nations. Economists are projecting that Russia could fall into a steep recession, as GDP could decline as much as 6%. The nation is experiencing what economists call "capital outflows" of $125 billion a year-a fancy way of saying that wealthy Russians are taking money out of Russian banks and either investing abroad or putting their rubles in banks located in more stable foreign jurisdictions. And in the process, they are exchanging their rubles for local currency, as a way to protect against the recent free-fall in Russia's currency. While Americans might find this mildly entertaining, it is probably not happy news for Russian President Vladimir Putin.

 

So for now you have my permission to cheer the lower oil prices because while no one has a crystal ball, it's hard to find someone who thinks you should factor lower oil prices into your long term plan.

 

 

This article was initially researched by Bob Veres and reproduced with revisions by permission.

 

 

ABOUT BOB VERES

Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. He is editor and publisher of Inside Information, an interactive subscription-based information service for financial planning professionals. He currently serves as contributing editor and columnist for Financial Planning magazine. Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine. Bob Veres is not affiliated with Morris Shank Wealth Management or LPL Financial. For more information about Bob Veres, visit www.bobveres.com.

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