Retail and the Price of Oil

The remarkable decline in the price of oil has had a huge impact on aspects of the global economy ranging from manufacturing and transport costs to the price we pay for our food. Despite discussions among OPEC members about addressing price levels, the price is still more than 50 per cent below where it was in June 2014. Downward pressure is coming from Saudi Aramco’s announcement of a pending increase in oil production and Iran’s re-entry into the market.

The retail industry

The retail production cycle depends in part on the complex, ongoing, criss-crossing transportation and distribution networks that ultimately put products in the stores where consumers can buy them. The whole global operation uses a great deal of fuel.

Traditionally, this has meant that rising energy prices led directly to higher retail prices, burdening both retailers, whose margins are already razor-thin, and the consumers who buy their wares.

One might expect that a drop in oil prices would have the opposite effect and produce savings, with the secondary effect of increased consumer expenditure, but this does not appear to hold true. Evidence suggests that, while a falling price leads to lower prices at the pump, low oil prices do not correlate with increased consumer spending.

Why not? The explanation seems to be based largely on two factors: consumer confidence and the fact that the price of fuel is not enough to materially influence expenditure, constituting as it does an average of only 2.5 per cent of individual spending.

Consumer confidence

When retail sales are up, pundits usually put it down to consumer confidence. If we believe that our jobs are more secure, that wages are rising, and there is less need to save for a rainy day, we are more inclined to spend. Low petrol prices may provide welcome relief, but overall economic well-being is of greater concern to the public.

Nowhere has this been more in evidence than in the US. Karen Katz of Neiman Marcus noted that many of the department store’s customers have ‘investments in the oil and gas business, and that has had an impact on spending.

The state of the stock market correlates directly to luxury sales. The economic ramifications of low oil set off a wave of volatility, affecting the investments of high-end consumers and, by extension, the confidence that stems from shoppers’ net worth.

The overall situation

The price of oil seems to be – for the retail sector, in particular – a secondary concern, with weaker oil more likely to lead to savings than expenditure.

Still, there are signs that the stock market, and the retailers whose fortunes are tied to it, may experience some relief. Oil hit a recent high of $50 per barrel in May.

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