Sharp Fall in Oil Prices: Tax and Economic Impacts



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Sharp-Fall-in-Oil-Prices
Oil prices have quickly fallen as of October 2014 to 44 month lows.  As seen in the chart below, which illustrates the average prices for the past four years, 2014 gas prices have significantly dropped.

Tax Impact

The most direct impact is the collection of federal highway and state taxes at the retail gasoline pump. The federal highway use tax, applicable to highway motor vehicles with a gross weight of 55,000 pounds or more, is 18.3 cents per gallon and 24.4 cents per gallon for diesel fuel.  Federal gasoline taxes are used as the primary funding mechanism for highway infrastructure projects and this funding had been declining from steadily decreasing gasoline purchases. In the face of the country’s crumbling large infrastructure, this method of funding highways was already viewed as inadequate. Lower fuel prices and increased near term, vehicle-related fuel consumption should somewhat help the highway trust fund.  However, in the long run the consensus is that the highway use tax is inadequate for America's needs and should be given thought as to alternative funding methods.

Consumers

For many consumers, a major reduction of prices at the pump is economically equivalent to a tax refund and should stimulate consumer spending particularly at the retail level.

Trucking and Logistics

Fuel prices are a major cost for trucking and logistics companies and this is a welcomed cost reduction, particularly during the year-end holiday period which is the busiest time of the year.

Air Travel and Hospitality

After labor costs, fuel costs are this industry’s biggest variable cost.  Virtually all of the major carriers are now operating post bankruptcy and have controlled many of their other costs. Hopefully these important cost containments will help the industry better weather a more challenging global economic environment.

Chemicals and Plastics

Oil is major raw material for products in these industries.  Companies in these industries have already been enjoying a U.S. economic resurgence and competitive advantage from lower fuel costs in the U.S.   Further oil price declines should help maintain this competitive cost advantage. 

Electric Vehicles

Lower gasoline prices will mostly slow the introduction of electric vehicles (EVs).  However, EV technology, including the number of charging stations, is steadily improving and the industry should be better positioned when the inevitable oil price cycle changes and reverts to higher prices.

A major swing in a core commodity’s pricing creates winners and losers.  In the short run, a major decline in fuel prices should benefit most Americans.

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