Let’s look at the Saudi price cuts in the context of the accounting identity that states that for everyone who spent less than his income, another must must have spent more than her income or that much output would not have been sold. ;)

The price cut itself shifts income from producers to consumers. And to the extent that consumers have a higher propensity to spend that gain than the amount the producers will cut spending more output will get sold. So the analysts who are forecasting a net gain for the US economy are hanging their hats on consumers spending more of their fuel savings than producers who lose that much income cutting back on their spending. Not to forget the potential loss of US exports that are sold to non residents spending their incomes earned from oil production, and the new US consumer spending that will be spent on imports. In other words, there may not be a whole lot of difference in total spending.

And there is another factor. While new oil related investment was partially financed from earnings it was also funded via agents ‘spending more than their incomes’ through bank loans and other forms of debt.

That is, part of the ‘spending more than income’ that was critical to the support of US domestic demand was coming from the energy sector. And much of that support is fading fast, as reports of reduced capex, falling rig counts, etc. continue to accelerate.

Additionally, to the same point, a deflationary environment tends to subdue bank lending, as previously discussed. And housing prices, for example, were already softening prior to the oil price cuts.

Therefore, to the extent that the ‘borrowing to spend’ falls back more than the oil consumers vs producers propensity to spend increases, aggregate demand/sales/GDP/employment falls.

Not to mention the oil price itself goes into the GDP calculation to the extent the oil price drop exceeds the GDP deflator.

I was already looking for a weak Q4 and beyond due to the deficit being too small for the current degree of credit expansion, and now this makes it a whole lot worse…