More in the bank after filling the tank?
A fall in petrol prices is often compared to being like a tax cut for people.
It leaves a little extra in the bank for drivers after they have filled the tank.
And – less directly – the relief can be delivered even more widely by the lower oil price pushing down the rate at which prices rise in general. This is because oil is used in many important ways including transport and heating.
A fall in the price of oil is typically linked with strengthening growth but there will be losers as well as winners – with oil producing nations, for example, typically suffering when prices fall (and benefitting when prices rise).
Supply and demand in action
Oil is a commodity, as producers make an almost identical, interchangeable product.
Commodities are characterised by having highly volatile prices. The price of oil is driven by supply and demand – and sudden changes either can quickly have very large effects on the price.
What happens when prices rise?
A change in the price of oil can do strange things to the way people manage their money.
A study of reactions in the United States when petrol prices rose showed “people behaved as if they were much poorer, buying cheaper gasoline as if a $2 increase in gasoline prices had decreased their annual income by tens of thousands of dollars.”
The authors suggest that the tendency to divide money into separate spending buckets – known as “mental accounting” - was a reason why.
If prices in one category rise or fall dramatically, it can be helpful to review all spending categories (food, utilities and other parts of your budget) to get a better sense of how much leeway there is to balance the books.