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 the U.S. in the short and long term?.
Here’s an excerpt from the column:
“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?”
We discuss the three factors drive the price of most commodities, including petroleum: the U.S. dollar, supply and demand.
Source:
What do falling oil prices mean for the U.S. in the short and long term?
Barry Ritholtz
Washington Post, Todays date 2015
http://wapo.st/1Bf7lAw
I agree with you Barry. That is why Ford motor has become my biggest individual stock holding. I like Ford for the reasons you mention in the article: lower oil leads to more truck sales. Also, if the shares can trade north of $19, then a massive basing pattern will be completed with an implied target of $37.
Minor correction: Oil for electrical generation is insignificant, has been since the early1980’s, post 70’s oil shocks when virtually all of the oil burning power plants were converted to natural gas.
The big exception is Hawaii – effectively screwed, since liquid natural gas isn’t an economical alternative (cost of conversion being too high, and the burden of oil prices restricting how much capex they can do).
Also, what is being ignored is the very high cost of new oil R&D in the States, and elsewhere. A whole lot of denial about hard economic realities. The profit point isn’t clear, but from my readings, under $75 and things get dicey, at $50, expect exploration and production to slump seriously.
I work in the electrical generation business. They were phasing out oil generation about when I started about 30 years ago. It is mainly coal, nuclear and natural gas now. Where the wind gradient is enough wind power is economically viable. We are experimenting with sun power. But is still is not economical viable. Fracking has shown that we have a lot of oil and gas and it can be extracted. Loads of money potential there. If the Saudi’s drive prices down a huge incentive to find cheaper ways to extract oil and gas from tight rock formations. With fracking we had something that did not exist for over 50 years at least. A real energy market place for oil and natural gas. People went nuts when I posted a while back it was predictable that eventual we would go into oversupply. The when of course was harder. With the prize of big bucks it is not hard to predict that people will figure out how to do it cheap enough to compete with the older types of oil wells on price. The when is harder. But nothing is new under the sun. At the end of the middle ages Europeans invented the skills to sail around the bottle neck of the Middle East to directly get at the Far East and it’s spices , silks and other luxury goods. History may not repeat but it rhymes a lot.
Couple of recent articles on the drop in rig count and in the case of Sandridge Oil, how that has impacted share price:
Oil Rig Count Continues To Plunge, Down 30 Percent From November – Forbes http://www.forbes.com/sites/christopherhelman/2015/02/13/oil-rig-count-continues-plunge-down-30-percent-from-november/
SandRidge Energy (SD) Stock Plummets After Report of Lowering Rig Count By 75% – TheStreet http://www.thestreet.com/story/13040044/1/sandridge-energy-sd-stock-plummets-after-report-of-lowering-rig-count.html
To give an examples of cost reduction strategies. The first is drilling multiple wells from the same pad, saving the cost of preparing multiple sites (it appears it takes 2 days to take down move and set up a rig for example).
However I expect that the disposal of fluids under the producing reservoir which is what causes the earthquakes, not the fracking will be banned and more costs will occur for treating the fluids (The idea that fluid disposal in deep wells causes earthquakes was found after a disposal well in the 1950 at Rocky Flats Co caused earthquakes there)
Hawaii has real potential for geo-thermal, solar and wind power. They also have a lot of terrain relief so they can use pumped storage to smooth out electrical generation vs demand. There are lots of alternatives that are becoming more t4echnically and economically viable.
Don’t forget one alternative energy that has not been tried much: tidal. I would think that islands — like Hawaii — would benefit greatly from an energy source such as tidal, especially given that it is an energy source that is 24 hours per day, 7 days per week and 365 days per year.
The economic impact? For the vast majority of Americans, its’ extra money in their pockets for the first time in years. Wages have gone nowhere in a while and for most Americans lower gasoline prices, natural gas prices and lower oil prices means the biggest raise in after tax income most have seen in how long? For our household, I calculated that between savings in gasoline for our cars and the natural gas heating bill, we’ve been saving like $400-$500 per month over the last 2-3 months! That is awesome! Filling up a tank of gas is now $30 and not $50. Heating bill is like $150 instead of $350. And I’m pretty sure that Americans aren’t the only ones enjoying this…
As far as oil companies, drillers, frackers & oil workers? Oh, well…I don’t see any tears being shed. C’est la vie. The rest of us have been taking it on the chin for some time. maybe it’s someone elses turn…
Agreed. Massive tax break for the paycheck to paycheck masses. And I shed no tears for Texas, either.
Interesting if the Saudi’s are going to have a little surprise again if speculators try to get the fracking machine rolling again eh?
Now is when the speculators and traders are actually doing their job of smoothing out prices. The significant difference between spot prices and 1 yr+ futures for oil has meant that traders are buying physical oil and storing it in tankers and other storage to provide delivery on the 1 year future they sold. That has kept spot prices up and smoothing the futures curve. However, unless the futures prices rise between now and then, that stored oil will be dumped on the market at that time helping to maintain the lower prices.
“Like so much else in the markets, energy prices are, by and large, a “zero-sum game.” From your article in the Washington Post. Which is why with the bumpiness I held my positions in my retirement portfolio. If you invest in funds that are diversified what one company loses another gains. Which is why you diversify in the first place.
Oil – On the demand side . . I don’t think even the This Old House folks knew the project they were working on in the Boston area required r-21 insulation values in the exterior walls b/c they framed the walls with 2x4s and the inexpensive fiberglass insulation only get you to r-13. To get to r-21 you need to add rigid foam to the walls and put the sheet rock over it , use closed cell blown in foam (really expensive) or frame the house with 2×6 w/fiberglass which adds not only the cost of the bigger studs but requires changes (costs) to all the windows and exterior doors.
Here’s my point, who knows the extent to these new building codes? I bet not the oil market experts but as these practices become required or recommended the demand for heating oil goes down . . a lot b/c the saving here are considerable. IMO (humble) these practices are not going away b/c the drop in the price of oil as most consider this just a head fake.
– No, falling oilprices are not a “zero-sum” game. It will increase financial stress in the banking industry. To increase the amount of credit one needs rising asset prices (e.g. oil) and now oil has fallen the amount of credit will be restricted. And that increased credit stress will lead to banks becoming more & more unwilling to lend and that’s very deflationary.
– I think the energy sector is heading for deep deep trouble. Lower oil prices means less cashflow and allows/forces banks to increase interest rates for those energy companies.
– The Michigan Consumer Sentiment has already gone up A LOT. Not surprising with falling oil & gasoline prices. But if the consumer is so bullish then why were Retail sales so weak in the last 2 months ? I have seen stores slashing prices by 70% BEFORE Christmas. something doesn’t jive.
There are always lots of people looking for loans. The banking industry has generally been some of the adults in the room that take the punchbowl away when the risks rise too much. One of the problems that has clearly arisen with the extensive securitization of loans is that many of the loan originators no longer hold the risk for more than a few days directly on their books. Instead the loan gets shifted away to parties that are several arms’ lengths away from the original loan. The security salesmen have generally interceded by then.
However, the deregulation of the banks has meant that they have separate arms that are trading the derivatives and securities far away from the loan originations.
In many cases, the banks have abdicated their responsibilities of providing high-quality risk management of loan portfolios and turned themselves into security marketing and trading machines.
A common dilemma in investment concerns how to profit from others’ misfortune without appearing ghoulish. That said (and my understood sympathy for the thousands of now unemployed workers), how might small investors take advantage of the downturn in Alberta? Canadian REITs?