The following is an excerpt from Provident Investment Management’s December Investment Comments.
Since June the price of a barrel of oil has declined about 30%, to roughly $75. The media characterized this as a negative, largely because of the growing energy independence of the U.S. and concern that lower prices will bring investment in energy to a standstill. While there is certainly some risk, analysts estimate the price of oil would have to fall below $60 per barrel to seriously curtail U.S. investment.
Further, the benefits of lower oil prices far outweigh any negatives in several ways. First, AAA estimates that drivers are saving about $250 million a day on gas compared to early summer. This is just like a raise and should make its way into consumption in future months. Second, oil is one of the largest U.S. imports, so paying less for it helps the trade deficit. Third, as an input commodity, lower oil prices help businesses, lessening their need to seek higher prices. This helps keep inflation in check.