Will Lower Gas Prices Boost The Economy?

Oil prices have dropped below $70 a barrel in the U.S. after OPEC opted against cutting production levels last week in what some analysts view as a bid by Persian Gulf states to test the willingness of American shale-oil producers to keep drilling wells.

What does this mean for the U.S. economy?

High oil prices in recent years drove the energy boom by making costly drilling techniques like hydraulic fracturing economically feasible, particularly in Texas and North Dakota. Now, rising global supplies of oil coupled with falling demand has brought prices down.

Bottom line: lower gas prices are still good for America. Prices of regular gasoline have fallen from $3.27 a gallon one year ago—and from a high of $3.68 in June—to around $2.77 on Monday, according to auto club AAA. That should provide a key boost at a time when growth abroad is faltering, even if lower prices curb investment in an expanding energy sector.

Here’s a look at how the gains and the losses add up:
Consumers spent $370 billion on gasoline last year. With prices expected to fall around 20% from their average during the first half of the year, the drop in gas prices over the past six months amounts to a $75 billion tax cut for consumers, according to an analysis one report from Goldman Sachs.

Lower gas prices also benefit most businesses because it reduces shipping and production costs. Goldman estimates that the total boost from lower gas prices should boost growth domestic product by 0.4 percentage points over the coming year.