The Mixed Blessings of Cheap Oil

The dramatic 70% plunge in oil prices from a year ago has wide-ranging effects. Here’s what it means for you and for the economy.

You’ll pay less for gasoline, but more for car insurance. Americans paid an average of $1.75 per gallon at the pump recently, down 65 cents from last year. Those prices imply a collective savings of $150 million a day on gasoline, according to the American Automobile Association. But lower gas prices lure drivers to the road, boosting the likelihood of accidents. In response, some auto insurers are raising premiums, says James Lynch, chief actuary at the Insurance Information Institute. “Over the past two years, the rate of crashes has increased. That pushes rates higher,” he says.

You may find a cheap flight. Lower oil prices result in lower fuel costs for airlines. So far, instead of passing savings along to customers, most carriers have used the windfall to reward employees, pay down debt and update their fleets. But Delta, United, American and Southwest are offering historically low fares on some domestic routes in order to compete with budget carriers, says George Hobica, founder of AirfareWatchdog.com. “They wouldn’t be able to match these fares were it not for lower fuel costs,” he says.

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It’s a net positive for the economy. Consumers haven’t been spending their savings at the pump, at least not to the extent that economists expected. Memories of the last, deep recession and troubles in the energy sector have put a damper on growth, says Michael Hanson, an economist at Bank of America Merrill Lynch. But Hanson believes most of the drag on the economy from the energy sector is behind us. “As consumers begin to realize that this drop in gas prices isn’t just a one-off,” says Hanson, “more confident consumers will begin to open their pocketbooks.”