Posts filed under “Energy”

What do falling oil prices mean for the U.S. in the short and long term
Barry Ritholtz
Washington Post, February 14 2015




Since early 2014, the price of oil has plummeted. It peaked last year at $105 a barrel and is now about $50.The consumption and production of energy is a major component of the global economy. The huge drop in price has a significant impact in the United States — on corporate profits, employment and capital spending. Still, there has been a lot of misinformation — scare-mongering, really — about falling oil prices. A little context here can go a long way.

The economics of lower oil prices are nuanced and complex. Consider the questions it raises. What is the economic impact? Is the decrease in energy prices good for consumers and manufacturers? Or are falling prices a sign of waning economic activity? How much will corporate profits be hurt? What does this mean for hiring? And for your portfolio?

The overall impact of falling energy prices is felt in two steps. The immediate response is a decrease in energy sector profits. About 10 percent of the Standard & Poor’s 500-stock index’s profits are at risk. This relatively new information — the drop only started in September — is still making its way into the markets. The digestion of this information has created fear and market volatility, knocking the broad indices down by almost 5 percent. However, it is likely this is only temporary. Look for it to lead to an increase in consumer sentiment and spending, greater corporate hiring and bigger capital expenditures later this year.

What’s at work? Three factors drive the price of most commodities, including petroleum: the U.S. dollar, supply and demand.

Oil is priced in dollars. And it will trade inversely to the price of the world’s reserve currency. When the U.S. greenback fell in 2001 to 2008 (down 41 percent), the price of oil climbed over 500 percent ($22 a barrel to $147). As the dollar rallied 30 percent over the past five years, the price of crude oil has more than halved ($105 to $48). Think of the dollar as the measuring stick of oil; when the ruler changes size, so does the price of the measured goods.

Demand is the next factor. The United States — the world’s biggest consumer of oil (we use twice as much crude as China) — is not showing its usual post-recession uptick. Along with slower growth rates in Asia and the ongoing weakness in Europe, the global demand is softening.

A number worth noting: Americans drove 2.764 trillion miles in 2014, according to the government. From the November 2007 pre-crisis peak, total miles driven by all vehicles fell 3.65 percent.

In the meantime, hybrid car sales have climbed — the United States has about 3.5 million hybrid electric automobiles, second only to Japan. Even “clean diesel” car sales increased 25 percent in the first six months of 2014 (versus total U.S. car sales, up 4.2 percent).

That’s just transportation. As a fuel for electricity generation, oil is losing market share versus natural gas — it’s cheaper, cleaner and more reliable.

Supply is the last piece. Two notable changes from the past have occurred in the production of crude oil in United States and the behavior of Saudi Arabia.

The United States is producing nearly twice as much oil than it has in decades. It averaged a little over 5 million barrels a day in the 2000s. At the end of 2014, we were pumping over 9 million barrels per day. If these gains continue, the United States could become energy self-sufficient within a decade.

Saudi Arabia has responded to falling oil prices differently than they have in the past. Typically, its response to falling prices has been to cut back their production. That supply constraint was usually sufficient to brings prices back up. This time, they have chosen not to.

The immediate impact of lower prices has been negative. Up until now, oil exploration has been a source of high-paying employment. About 500,000 jobs were created in the energy sector since the recession ended. Capital expenditure — spending on rigs, pipelines and more — in the sector has also been robust. With falling prices, such spending is down.

Longer-term, however, the effects are more positive. Like so much else in the markets, energy prices are, by and large, a “zero-sum game.” One company’s loss is another’s gain. As exploration and drilling companies suffer a profit squeeze, transportation, retail and utilities benefit from lower fuel costs. Eventually the longer-term positive of lower energy expenses should replace the short-term negative.

The psychology of businesses and consumers adjusting to lower prices leads to a delay in changes in behavior. Doubts that the price change is permanent thwart additional spending. But the longer prices stay low, the more significant the changes. We have seen an uptick in the sales of SUVs, pickups and trucks — high-margin vehicles, sold primarily by General Motors, Ford and Chrysler. The longer oil prices stay low, the more of these profitable trucks will be sold.

Look at the entire nation of drivers: Every day oil is down $50 from recent highs, my back of the envelope calculations say American motorists collectively save up to $750 million on gasoline. Per day! If prices were to stay below $60 until September, that’s a windfall of up to $300 billion.

After a few quarters go by, consumers and businesses cannot help but notice more cash in their pockets and on their balance sheets. That is likely to benefit consumer and capital expenditures (corporate spending). Price drops could also give a kick to employment.

So long as the United States avoids a recession — and as of now, one does not appear on the horizon — look for the recent bumpiness to turn into economic gains and increased corporate profits. Neither of which is bad for your portfolios.


Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter, @Ritholtz.

Category: Apprenticed Investor, Economy, Energy

Falling Oil Prices & Your Portfolio

    My Sunday Washington Post Business Section column is out, where we look at the impact of energy on the Economy. The print version had the full headline “The oil supply, energy demand and a rip-roaring U.S. dollar: What it means for your portfolio” while online had the shorter What do falling oil prices mean for…Read More

Category: Apprenticed Investor, Commodities, Energy

Are Oil Price Declines Good for the Economy?

Are Oil Price Declines Good for the Economy? Kevin L. Kliesen Federal Reserve Bank of St. Louis Economic Synopses, 2015, No. 3     As expected, falling crude oil prices lead to falling gasoline prices and lower inflation. Since mid-June, the spot price of the U.S. benchmark for crude oil, West Texas Intermediate (WTI), has…Read More

Category: Energy, Inflation, Think Tank

Spectrum of Pain from Oil Price Decline

With the price of crude oil plummeting, why some countries are faring much better than others.

Oil Prices’ ‘Spectrum of Pain’

Category: Energy, Video

Job Recovery All Oil & Fracking ? Hardly

  “All of the job growth from 2007 to today can easily be attributed to the shale oil fracking situation and the oil Renaissance. If you take Texas and North Dakota out of the data series for job employment, what you see is that we haven’t added any jobs in the United States other than…Read More

Category: Bad Math, Data Analysis, Employment, Energy, Really, really bad calls

Global Monetary Policy Changes in a Map

Source: Deutsche Bank via Business Insider

Category: Economy, Energy, Inflation

The Plunge in Petroleum

Source: The Economist

Category: Energy, Markets

My Forecast Free Wish List for 2015

U.S. markets have declined in the new year. This isn’t necessarily a bad thing. When markets go straight up without pause and sentiment becomes excessive, it rarely ends well. A little dose of fear might be a good thing. Which brings me to today’s listicle. These aren’t forecasts, but events I’d like to see happen….Read More

Category: Energy, Markets, Real Estate

Oil, Europe, good and bad & Spain

Oil, Europe, good and bad & Spain David R. Kotok December 29, 2014     Less than two months ago, Oxford Economics modeled sensitivity to the oil price by conducting simulations on 47 countries. Their baseline then was an “$84 Brent crude price average in 2015… gradually recovering to $106 in 2019.” Their updated work has tested…Read More

Category: Energy, Investing, Think Tank

Falling Oil Prices Shake Up Many Markets

Source: WSJ

Category: Energy, Markets