U.S. oil prices dropped to a three-year low Tuesday, and when it comes to their impact on the economy, most analysts have focused on the positive.
Lower oil prices puts more money in consumers' pockets by cutting their driving costs and possibly their heating/cooling costs. In fact, Michael Feroli, chief economist at JPMorgan Chase, told Bloomberg
. that the oil price plunge would boost GDP by 0.5 percentage point in the next year.
But UBS Chief Investment Strategist Michael Ryan urges caution. "When oil prices fall, at least in the past, we've gotten a huge benefit from that. It's acted like a consumption tax [break] in the U.S," he told CNBC
Now, however, "since we're the marginal producer rather than consumer of oil, it doesn't have the same positive effects that it did," Ryan said.
"Usually when prices begin to break down, Saudi Arabia cuts production. They're not cutting it now," he noted.
"We [also] know Russia is under a lot of pressure to raise revenue so they're pumping as much oil and gas as possible," Ryan added.
"It's more of a supply story than a demand story. . . . But I would say on aggregate when you look at it, on balance this is a net positive for U.S. growth prospects."
U.S. crude oil production has advanced to 8.97 million barrels a day, the highest level in at least 31 years, according to the Energy Information Administration.
December West Texas Intermediate futures traded at $77.37 a barrel on the Nymex late Tuesday, down 28 percent from June 20. Prices dropped after Saudi Arabia announced Monday that it's cutting prices for U.S. customers.
"People are panicking," Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, told Bloomberg
. "There is this pervasive belief that the Saudis are in a market-share war."
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