1. Calling a reduction in oil spending a "transfer of wealth" is confusing and clickbaity. In economic terms, a transfer is a redistribution of income that is made without the exchange of any goods or services. We do not call a drop in the price of computers a "transfer of wealth," we call it a price cut.
2. While oil has a EDIT:LOW elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
3. Who is going to buy more oil because it has become cheaper? The plastics manufacturing industry might shift their recycled/new mix towards new as it is now relatively cheaper, but aggregate demand for oil would still be the same.
The article does a poor job of explaining oil market dynamics and is little more than unfounded speculation with a misleading graph and a few numbers thrown in.
> I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets.
If you look at the sales figures it is quite obvious that you're not in the majority here. It's a little tricky to model because cars are all getting better mileage every year, but when gas is expensive gas guzzlers definitely experience a dip in sales (and vice versa).
> Based on the simulation results, we estimate that a 10 percent increase in gasoline prices will generate a 0.22 percent increase in fleet fuel economy in the short run (one year)
> We also find that sustained $4.00 per gallon gasoline prices will generate a 14 percent long-run increase in fleet fuel economy relative to 2005 levels, although this prediction should be interpreted cautiously in
light of the relatively large out-of-sample price change considered and the Lucas critique (Robert E. Lucas, Jr. 1976)
The strength of the effect of oil prices on fleet efficiency is 0.0022 over a year. I would consider that extremely incremental. Meanwhile, we observe a 22% decrease in total car sales over the 2007-2009 period due to changes in disposable income and household wealth. [1]
So I would still argue that gas prices change the fleet efficiency mix around the margin, but that purchasing decisions are driven primarily by changes in income, government policy, and social norms.
The best proof of this behavior is the Prius. It's a simple appliance car that is cheap and reliable. By all accounts, it's a great car to own if cheap and dependable are your top considerations. However, the sales and depreciation of the Prius are highly correlated with gas prices to a much larger degree than similar economy cars, like the Camry.
Car sales are at record highs and Toyota just released a next generation (which always coincides with increased sales and higher transaction prices). Yet, sales are down 12% YoY.
Meanwhile, Jeep sales are at record levels and their best selling models are also their least fuel efficient.
> 2. While oil has a high elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
Oil generally is considered to have a low elasticity of demand, or better said, is relatively inelastic, especially in the short term. You appear to be using the concept backwards.
And while you may not have bought the argument that oil prices affect car sales, that fact continues to be true without your consent and is borne out by economic research.
I agree with you. Not only is it not really a transfer of wealth, but they never define what they mean by this abstract phrase anyway, nor does the article even link to the paper it's is using as it's basis (unless an adblocker is stopping me from seeing it.)
Beyond all that, I have contracted in and currently work on the fringes of the Permian Basin oil industry, and I am pretty sure that this rut in oil prices is actually going to create even more wealth for the uber-wealthy oilmen, because there was a lot of money floating around and a lot of new fresh upstarts got going in the boom, but now that prices are down and banks are calling in the dues, all the small guys are falling out one by one and the big guys are just mergers&aquisition-ing their way into bigger positions of control of the market. T Boone Pickens has already said he thinks we've seen the lowest low at 26 and it's only up from there. So after all the little guys get gobbled up, the big guys will go heavy long on oil futures and make a ton of money, drive oil prices right back up (through manipulation as always), and suddenly this supposed "transfer of wealth to the consumer" is going to be more like $10 a gallon bleeding of the consumer.
2 - In the UK we have vehicle excise duty (annual car tax) which is related to the official figures for emissions of the vehicle. Generally larger engines produce more emissions so there is a recurring cost to buying a larger car beyond the fuel itself.
3 - I heard a UK insurance industry analyst explaining that premiums are up year on year because the most fuel price sensitive customers (predominantly younger drivers and retirees) are driving more miles since prices fell last year, and these groups are also more accident prone.
> Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices?
Not you or me, but it's more common than anyone with the ability to make long-term financial decisions would think it is. The frequency of filling up at the gas station causes people to lose sight of the overall financial impact gas prices have on their budget (it's much less than they think it is).
That's what confused me too. If I've been selling everyone apples at $5/bag forever, and all of a sudden I start selling them at $2.50/bag, Bloomberg logic would dictate I'm giving them a $2.50 * number of sales wealth transfer?
Probably because while people may not decide to buy a vehicle because of low oil prices, they may however decide not to invest in a vehicle right now if petrol/diesel prices are tending upwards.
At least that is the case among middle classes in emerging economies.
3. Who is going to substitute something else for oil if they can, if oil is expensive? Everybody. Who is going to not bother (or not try as urgently) if oil is cheap? Many people. In practice, that's buying more oil because it's cheaper.
It's only a wealth transfer because the industries receiving revenue from oil consider that income 'theirs'. Besides being misguided, I think it's interesting insight into the mindset of businesses.
2. While oil has a EDIT:LOW elasticity of demand (people need to drive to work and heat their houses), I've never bought the argument that cheap oil has a significant effect on car sales, especially in saturated developed markets. Who decides to make a $20k, 5-10 year investment based on something as volatile as oil prices? Car sales are driven mainly by income growth, marketing, and social pressures.
3. Who is going to buy more oil because it has become cheaper? The plastics manufacturing industry might shift their recycled/new mix towards new as it is now relatively cheaper, but aggregate demand for oil would still be the same.
The article does a poor job of explaining oil market dynamics and is little more than unfounded speculation with a misleading graph and a few numbers thrown in.