Florida TaxWatch Economic Commentary
Pumping savings into the economy
Do Oil Prices Affect the Stock Market?
A popular headline that seems to overshadow the decline in oil prices is the idea that their decline negatively affects the stock market. The talking point has become so popular that it can be heard discussed by the mainstream media on almost a daily basis; however, a study published by the Federal Reserve casts serious doubt that oil prices (and, in turn, gasoline prices) have any real effect on the stock market at all.
The study, which analyzed 10 years of data relating to oil prices and the S&P 500 index (widely used as a broad market indicator), concluded that the overall relationship between oil and stocks does not appear to be strong in either a positive or negative context. 15 The study found that over a 10 year period, the price of stocks and oil both climbed, but the changes did not seem to correlate in any significant way. 16 The study instead asserted that those industries directly affected by energy costs, such as transportation, are the only stocks that may be directly impacted by the price of oil. 17
It is also important to note that that changes in the stock market, no matter what is driving the changes, do not have a direct effect on most Americans. Roughly speaking, 90% of all stocks are owned by 10% of the population; 18therefore, a decline in the stock market usually affects investors and people who work for the companies experiencing declines in stock prices, which is where one can actually find some negative side effects from declining oil prices.
One Industry Feeling the Effects
While a majority of Americans benefit from lower prices at the pump, there is one industry that has (naturally) taken a significant blow due to the decline in oil prices. The oil and gas industry has felt significant negative effects, to the tune of 250,000 industry jobs lost around the world. The industry has also cut more than $100 billion in spending and suspended production on more than 1,000 rigs, primarily due to lost revenue as a result of low gasoline prices. 19 States that rely on shale oil production, such as Texas, North Dakota, Colorado, and Oklahoma are now lagging behind the rest of the nation in job growth. 20 With oil prices expected to remain low in the coming years, the economies in these states will continue to struggle. 22
While the private sector tied to oil has been greatly affected, some state governments are also starting to feel the effects of the decline in oil prices. Currently, Texas’ public assistance expenditures are on pace to exceed the previous forecasts for 2016. 22 Alaska, on the other hand, has been forced to propose higher taxes on products such as alcohol and tobacco to make up for the decline in oil revenues, an industry responsible for 80% of the state’s operating budget. 23 With the expectation that oil prices will remain low, states that are heavily reliant on the industry must prepare for the continued effects. 24
While it is true that the decline in oil prices and, in turn, gasoline prices, have a negative effect on a few specific industries and regions, overall, low oil and gasoline prices are a net positive. 25 The benefits of lower gasoline prices is wide-ranging, affecting an overwhelming majority of individuals in the United States. Individuals are able to save roughly $700 a year and, as a result, have more expendable income that is able to flow into many different sectors of the economy. Americans can look forward to gasoline prices remaining low, allowing them to save money at the pump for the foreseeable future.
15 Do Oil Prices Directly Affect the Stock Market? The Federal Reserve Bank of Cleveland.
18 How Worried Should We Be About the Stock Market’s Recent Decline? Economic Policy Institute. August 2015.
19 Global Oil Job Cuts Top 250,000. Bloomberg Business. November 2015.
20 Falling oil prices put the squeeze on state budgets. CNBC. January 2016.
21 Russia’s Big Worry Is Not What the Pentagon Thinks but What Shale Frackers Will Do to Oil Prices. Manhattan Institute. February 2016.
22 Falling oil prices put the squeeze on state budgets. CNBC. January 2016.
24 Global Oil Job Cuts Top 250,000. Bloomberg Business. November 2015.
25 Why Cheap Gas Might Not Be Good For The U.S. Economy. NPR. February 2016.
Economic Commentary written by
Kyle Baltuch, MS, Economist
Robert Weissert, Executive VP & Counsel to the President & CEO
Chris Barry, Director of Publications
Michelle A. Robinson, Chairman of the Board of Trustees, Florida TaxWatch
Senator George LeMieux, Advisory Board Chairman, Center for Competitive Florida
Dominic M. Calabro, President, CEO, Publisher & Editor
Florida TaxWatch Research Institute, Inc.