Lower Gas Prices Fuel Far-Reaching Effects


As of Jan. 5, the national average price of gasoline was $2.20 a gallon — the lowest since May 9, 2009, according to AAA. The national average had fallen every day since Sept. 25, the longest such streak since at least 2000.

Despite the recent dip, gasoline prices remain high relative to historical norms. From 1986 to 2003, the national average ranged from $1.51 to $2.06, adjusted for inflation, according to The Wall Street Journal. Regardless, today's lower fuel prices could further boost consumer sentiment and help invigorate the economy by increasing consumers' discretionary income.

The average U.S. household is projected to spend $1,962 on gasoline and motor oil in 2015, down about $550 from 2014 and the lowest in 11 years, according to the U.S. Energy Information Administration. Reduced fuel spending should give a lift to Wal-Mart Stores ($89; WMT), Target ($77; TGT), TJX ($68; TJX), and restaurants that cater to lower-income consumers. Recommended retailers Foot Locker ($57; FL), Kroger ($65; KR), and Macy's ($68; M) also seem likely to benefit, though some Kroger and Wal-Mart locations also sell gasoline. Macy's said in November that lower fuel prices should help January-quarter results, though it tried to temper expectations.

Other pockets of the economy are also positioned to benefit. Cheap fuel tends to encourage Americans to drive more, stoking demand at auto-parts retailers and potentially guiding U.S. auto sales to a sixth straight year of growth. Fuel accounts for about one-third of operating costs at both Alaska Air Group ($60; ALK) and Southwest Airlines ($41; LUV). With about 40% of its 2015 fuel needs hedged, Southwest anticipates per-gallon fuel costs of $2.30 to $2.40 this year, compared to $3.01 in the first nine months of 2014.

As the Great Recession showed, contagion in one part of the economy can infect other areas in surprising ways.

Industrials: Railroads have little direct exposure to the energy sector; the shale-drilling industry represented about 4.5% of Union Pacific's ($113; UNP) 2013 volume, while Norfolk Southern ($103; NSC) relied on crude oil for just 1% to 2% of its volume. However, a prolonged decline in gasoline prices could help truckers undercut railroads on price.

Financials: Small or financially fragile energy companies could begin defaulting on their debt, inflicting fresh damage on banks and their recently repaired balance sheets.

Whatever the effects, a big near-term reversal in fuel prices seems unlikely. In the first days of 2015, U.S. oil prices dipped below $50 a barrel to their lowest levels since spring 2009. Prices consumers pay at the pump tend to trail crude-oil prices by several weeks. Alaska, Foot Locker, and Union Pacific are rated Focus List Buy and a Long-Term Buy. Macy's and Southwest Airlines are Long-Term Buys. TJX is rated A (above average). Norfolk, Target, and Wal-Mart are rated B (average).

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