I am always dubious about views too popular with economists So unlike most of them I do not think falling oil prices will be all that good for the US economy. Maybe they were when most of the oil was coming from Saudi Arabia, but now it is coming from here . Lots of US jobs will be lost, not just to drillers but to those who supply them with goods and services. The fastest way to cut expenses is to fire people. In the oil business many of these are contractores , even easier to fire.
The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle- class jobs – throughout the economy, from construction to services to information technology. 4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry. 5. Oil & gas jobs are widely geographically dispersed
Not to mention losses to investors and banks from falling energy company prices and distress and bankruptcy in high priced or leveraged oil producers. The present malaise in the market may be reflecting that, and markets are smarter than consensus economists.
I have been thinking about oil prices and the effects.
We know that lower oil is basically good for overall economic growth. I mean world economy. Increased global growth means a net increase in demand for goods and services. Lower oil will also lower costs for many companies which means higher earnings. Lower oil will give people more disposable income which means they will buy more. Most people always spend all the money they have so if they have more because they are paying less for gas then they will buy more other stuff. Also, lower oil keeps interest rates lower for longer. Lower interest rates promore higher growth and investment.
There will also be losers with lower oil. Obviously, oil producers will be hurt. Yes, the US oil and gas industry will be hurt. Yes, the people who work in the oil industry will be hurt. So what will be the net effect for the US? I think it will still be positive. Other losers could be substitute products for oil and gas. Lower oil means the cost differential between petroleum and other sources of energy will be diminished. Solar is one example.
I’ve been reading that there will be a lag in a decrease in US oil production. Despite current lower prices, US production will still increase into next year (maybe until mid-2015 if I remember correctly) because production investments made in the past are still coming online. Also, I read that many oil producers have hedged against lower oil until mid-2015.
OPEC has stated that they won’t cut production even if oil hits $40. I think we can see oil to go lower but I wouldn’t bet on it.
Longer term I think US shale will resume production and investment. First, shale extraction costs will continue to decline through innovation. Second, some companies that have entered into land leases to extract oil will go bankrupt. But they will have build improvements onto that land…roads, surveys, etc. The landowners will be able to release the land to new companies but the roads and other improvements will be in place to be used…this will lower the project costs for the new leasees. This will take time, but the oil is down there. There’s a lot of oil down there and I believe that all that shale oil will be a ceiling on oil prices. If the price rises then production will increase until supply meets demand. Perhaps the days of $100 oil are permanently gone?
Main stream economists mostly think those people saving $15 a week on their gas fill ups are just going to run out and spend the money on things s made in America. IOW there will be a beneficial increase in velocity of money. But they have no evidence to back that view, just theory. In fact it isn’t a lot of money, and people may regard it as they normally do bonanzas, and use it to pay off debt. Or save it.
With little or no velocity the money won’t do much for the economy. Even the average Joe knows that gasoline prices come and go , that long term decisions shouldn’t be made on the basis of fickle gas prices. Yes,some will go out and buy that SUV. Most of which will be made in foreign countries, or at least using a lot of foreign parts with corporate profit flowing abroad. Or use it to buy various consumer goods, most of which are made in China. In any case it isn’t much money compared to GDP.
The consensus of economists (or at least the ones I hear on the media) seem convinced the economy is picking up. But most of the economic growth in the US in the last several years has occurred in states with oil booms. So I think there is a good chance the economists (read entrail examiners) will be wrong once again.
Gaucho I don’t disagree with that view that long term lower oil prices might beneficial., In part because lower oil prices have in them the acorn that will grow into higher oil prices,
. Eventually.
But “eventually” could be a long time. I invest for the shorter run (except for a few deep conviction stocks) and in the next couple of years I think consensus will once again be wrong, falling oil prices will have either neutral or slightly harmful effects on the economy. I could give more prognostications but my supply of of tea leaves and entrails is low at the moment.
In fact even though I would be surprised to see oil prices much above $80/bbl in the next 4 or 5 years I will not join the ranks of all those who predict oil prices. Because almost all of them have been shown to be wrong in the past.
Oil and solar are not related, almost all oil is used for transportation, almost all solar is for fixed use. Any connection is remote.
Since the U.S. invasion of Iraq in 2003, the traditional centers of power in the Arab world—Egypt, Saudi Arabia and other Gulf states—have been nervous about the growing influence of Iran: its nuclear ambitions, its sway over the Iraqi government, its support for the militant groups Hezbollah and Hamas, and its alliance with Syria. The conflict is now a full-blown proxy war between Iran and Saudi Arabia, which is playing out across the region.
IMO it is likely that Iran has more undiscovered oil than any nearly comparable sized country in the world. But they are too incompetent to find it, and the oil they have is not cheap to produce. It will get even more expensive if the US and EU ever really get tough about sanctions because they need foreign equipment to drill and produce new fields,
Also, I read that many oil producers have hedged against lower oil until mid-2015.
While there is no doubt hedges will soften the blow of low prices for many producers it doesn’t follow that this will lead all or even most producers to continue on their merry way.
Take Continental for example IIRC they monetized their hedges at around $80 and predicted they would still raise production by 20%. Well after that nifty move today’s oil price would decrease Continentals distributable cash flow by 30% (cash flow sensitivity is 16.2 for every $15 decline in the price of oil) and this is for a company that at $86 oil was only expected to 75% of capex with cash flow.
Point being, at these prices (if they linger) you can expect to hear from Harold Hamn again and it won’t be to tell you production is rising.
You can rinse and repeat variations of the same thing with all hedged producers, the hedges are money good whether they continue to drill or not and deciding to drill an uneconomic well simply because you are hedged would be every bit as stupid, if not more so, than to drill one without the hedge.
While I understand the worry, oil and gas production are a small part of the economy overall. (That is not to dismiss the local effects on the booming areas swimming in Fracking money).
So even if we returned to to the 124K figure we are talking about fewer than 100K jobs lost and more money in the pockets of 300 million Americans. Really hard on the people who lost jobs, hopefully they saved up in the good years, but really good for the rest.
So even if we returned to to the 124K figure we are talking about fewer than 100K jobs lost and more money in the pockets of 300 million Americans.
Very true. But globally there are 7 billion people (although 50% earn less than $2 a day). The world economy is $75 trillion dollars. A lowering of energy prices which feeds the world economy will promote growth. Some estimates say that every $20 drop in oil increases global growth by 0.4% within 2-3 years.
We’re now working on our 3rd $20 drop. So if those economists are right (and it does make sense), then 1% extra growth is $75 billion per year of extra economic value created.
We’re also fortunate enough to live in a global world. We’re not subject to invest our dollars in local economies dependent on shale oil or even in the American economy. We can invest anywhere we want through companies listed on American stock exchanges or even companies listed on foreign exchanges. The article referenced above also goes into which areas will benefit from lower oil and which will be harmed by lower oil.
We also need to remember that a part of oil’s decline is because of the strengthening of the US dollar. Oil is priced in US dollars. A higher US dollar will have it’s own effects. US exporters will be hurt.
I’ve been thinking about the effect on UBNT which sells a large portion of its products overseas. Will they leave their pricing alone or cut prices due to the stronger dollar? UBNT already has by far the lower prices so a strengthening dollar can also push up the prices of competitors such as Cisco. Not sure what to make of the net effect of a stronger dollar on UBNT…
We’re now working on our 3rd $20 drop. So if those economists are right (and it does make sense), then 1% extra growth is $75 billion per year of extra economic value created.
Correcting my math error. It’s $750 billion per year!!
Those 124,000 people don’t exist in a vaccuum, and they earn well above minimum wage. The money they spend supports other jobs. Also the source you quote lists only 5 occupations when many more are involved. The actual field workers are like combat troops, only the point of the spear. Actually several million people are employed in that business. If prices stay low thee will be a lot more than 100,000 jobs lost. And declining oil prices hit landowners too, less oil royalties, the less they spend.