A light at the end of the tunnel

Market Watch
A bright spot
Commentary: There's something to be hopeful about
By Irwin Kellner, MarketWatch
Last update: 8:33 p.m. EST Nov. 24, 2008

PORT WASHINGTON, N.Y. (MarketWatch) -- There's a light at the end of this tunnel we're now in -- and it's not a train coming at us.

No, Virginia, it's falling oil prices.

Since midyear, the drop in gasoline prices alone has put over $200 billion into people's pockets.

When added to the $150 billion in rebate checks that the government put in the mail during the summer, this has boosted our collective buying power by more than 4% in the last four months alone.

To make matters even more satisfying, the $200 billion from the decline in oil prices did not come out of Washington's coffers, thus it did not add one nickel to the government's burgeoning budget deficit.

It's also providing a needed lift to confidence. The sighs of relief at gas pumps around the country are palpable.

Simply put, $2.00 a gallon looks a lot better on the way down from $4.00 a gallon than it did when it was first breached on the way up.

And while some folks are beginning to drive a bit more and maybe a few more trucks and SUVs are moving off dealers' lots these days, it's all good.

We're still driving fewer miles than we did a year ago. In addition, people are continuing to switch from gas guzzlers to more fuel efficient vehicles, are taking fewer driving vacations and are shopping less. They are worried that this drop in gas prices is only temporary and will reverse when the economy picks up again.

But even if they do rise, prices for oil and gasoline are unlikely to regain their peaks reached in early July -- at least not anytime soon. Those levels reflected a bubble which has since burst.

With the benefit of hindsight, $4.00 a gallon was the tipping point. It set in motion changes in behavior that will remain, as will their side effects.

For example, the resulting cutback in shopping has led to unprecedented discounting by retailers all across the price spectrum. This has helped put the brakes on inflation: from a year-to-year gain of 5-1/2% a few months ago, consumer prices are now up only 3-1/2%.

Businesses of all stripes are finding an unexpected windfall in their budgets. It's helped them cut costs without firing workers and hurting their suppliers.

Besides airlines, delivery services and mass transit, cheers can also be heard from factories, hospitals, and landlords -- and even from local governments. Indeed, all users of energy are benefiting from the fall in prices.

Lower gas prices could even result in a modest pickup in spending -- just in time for the important holiday shopping season. It might even give the banks enough confidence to resume lending -- especially since today's low interest rates make it easier for borrowers to repay their loans.

Who knows, this might even thaw out the frozen financial markets without any more involvement by the government.

Finally, the reduction in use of oil and gas also reduces pollution. Less carbon dioxide emissions will help us achieve a cleaner environment.

Looks like a win-win to me.

Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.