Tuesday, December 16, 2014

How does Cheap Oil Risk U.S. Jobs and Pensions?

FORBES (from 2011): ExxonMobil CEO Says Oil Price Should Be $60 To $70 A Barrel -- "Rex Tillerson, the boss of ExxonMobil admitted last week that the price of oil–based purely on supply and demand- should be in the $60 to $70 a barrel range. The reason it’s above $100 a barrel, Tillerson explained, is due to the oil majors using futures contracts to lock in current high prices, and speculation that is engineered by the high-frequency trading of quantitative hedge funds."

Fast forward to December 2014...

The DOW (Source: Google Finance)

DOW JONES on December 16, 2014

The Economist (December 15, 2014): "As the oil price plunges, gloom and ill-will, oddly, abound. Be careful what you wish for. After years of grumbles about a historically high oil price, the cost of crude has tumbled. But cries of woe are outnumbering the shouts of joy. Exporters, oil-company shareholders and industry suppliers are all contemplating a future of oil at $60 a barrel—or below. So too are all the people who lent money to them. Markets are pricing in the pain and pessimism immediately, while seeming to discount the future gains to energy users ... Weak demand is only a minor factor, though. The biggest cause of the falling price is rising supply from non-OPEC countries, particularly from America ... Spending on new projects is falling, chilling the prospects for jobs and profits ... In theory, lower prices should boost demand ... So long as the era of excess supply and declining profits continues, rivets are popping."

CNBC: (December 16, 2014): Ticking time bombs: Where oil's fall is dangerous -- "Oil consumers, from motorists at the gas pumps to energy-hungry economies such as those of China and the United States, are enjoying the windfall of cheaper crude. Producers, on the other hand, are bracing for a sudden, sharp loss of tens of billions in revenues ... Russia and Venezuela are among major oil exporters facing the biggest risk of political and social fallout."

CNBC (December 16, 2014): "Global demand is still expected to grow next year, but by far less than many thought earlier this year. The economies of China, Japan and Western Europe — the top oil consumers after the United States — all appear to be weakening. Oil demand falls when economic growth stalls ... The depth of oil's plunge could be a signal that the global economy is struggling even more than economists think. A weak global economy could hurt the U.S. economy by reducing exports, employment and spending, which together could outweigh the economic benefits of cheaper fuel ... For oil companies, oil-producing states, and oil-exporting countries, the oil price collapse is painful ... States that rely on taxes from energy production such as Alaska, North Dakota, Oklahoma and Texas will see lower revenues and some have already had to trim budgets."

Econbrowser: "West Texas Intermediate sold for $105 a barrel at the start of July [2014], but ended last week at $58. The most important factor has been surging U.S. production. But another reason oil prices have slid so much is weakness in demand for the product, which may be related to a slowdown of overall world economic growth."

Tim Duy's Fed Watch: "The string of solid US economic news continued with industrial production advancing 1.3% in November. Year-over-year growth (5.2%) is now comparable to the late-90's. Meanwhile, the international fallout from the oil price drop continues [and] Russia is a classic emerging market crisis story. The decline in energy prices reveals a currency mismatch between assets and liabilities."

Fox News (on December 13, 2014 @ 10:30 am PST) said U.S. stocks are faltering because of low oil prices (and that's because the global economy is slowing), and that this may be taking a bite out of our 401ks and pensions — and that U.S. oil producers may cut back production, which in turn, could affect jobs.

* Question: Are we damned either way — with either low oil prices or high oil prices?

Fox Business (last month): "With new technology such as hydraulic fracturing (fracking), the U.S. has been able to access large deposits of oil and natural gas that were previously unusable. Seemingly overnight, the U.S. has gone from one of the largest energy importers to one of the world’s largest energy producers. This has helped the U.S. to be less dependent on foreign energy sources as well as create thousands of new jobs. In addition, we can enjoy very low energy costs compared to almost anywhere in the world."

Paul Krugman (December 15, 2014): "It’s impressive just how quickly and convincingly the wheels have been coming off the Russian economy. Obviously the plunge in oil prices is the big driver, but the ruble has actually fallen more than Brent — oil is down 40 percent since the start of the year, but the ruble is down by half ... Saudi Arabia only accounts for about 13 percent of world production ... The last time there was anything like the recent oil glut, namely back in the 1980s, even drastic cuts in Saudi production weren’t enough [to keep prices high] and prices crashed."

Charles Schwab Market Update (December 16, 2014): "Stocks Under Pressure as Oil Continues to Drop:

The U.S. equity markets are lower in early action, with oil's persistent drop continuing to weigh on sentiment as the Street grapples with potential ripple effects outside of the energy sector ... Overseas, Asian stocks finished mostly lower amid the oil concerns and as a read on Chinese manufacturing activity contracted.

The European equity markets are trading mostly lower in afternoon action, with upbeat eurozone economic reports being overshadowed by concerns toward Russia and the persistent pressure on oil prices with Brent crude oil falling below the $60 per barrel mark for the first time since July 2009. Russian stocks are falling sharply on the dropping oil prices and as the nation's central bank's aggressive interest rate action is failing to stabilize its currency, with the ruble falling sharply."

Stocks in Asia finished mostly to the downside on the heels of the solid declines in the U.S. and Europe yesterday that came amid the continued drop in crude oil prices, which is fostering heightened volatility and pressuring commodity-related issues. Moreover, a disappointing read on Chinese manufacturing activity kept global economic growth concerns elevated."

The average man (or woman) on the street is not very savvy on the economics of the global oil market, but this post (A glut of oil?) makes some very interesting claims; and the reader's comments are very interesting as well. Perhaps after reading through everything, maybe someone can sum it up in layman's terms as to:

1) How do U.S. (consumers) benefit from fracking?
2) How can the U.S. possibly ever be "energy independent"?
3) What constitutes a real "oil glut"?
4) How can energy prices brought down voluntarily?
5) Should the U.S. export refined oil (or crude, or it's byproducts) on the global market?
6) How does moving Canadian oil (via the Keystone pipeline) to refineries in Gulf Coast states benefit American consumers?
7) Should Canadian oil (moved through any pipeline at all) be taxed for royalties for State budgets — or for direct payment to their citizens, like oil profits are in Alaska?
8) Why shouldn't the U.S. government nationalize America's natural resources (oil and natural gas) solely for the benefit of domestic consumption, rather than allowing a very few at the very top to mostly profit?

Above all, please don’t say any of these things will raise stock prices for the energy companies, which would also help retirees with 401ks and pensions. Hedge fund managers, private equity and banking CEOs (institutional investors) and the very top 0.01% do far much better with stocks than we do (The top 10% owns 90% of the stocks and the top 1% owns 50% of the stocks.)

* Question: So what good is cheap and abundant oil — even if we can have cheap gasoline for our cars and cheap heating oil for our homes, but then our retirement plans get screwed by a declining stock market? Wouldn't that mean “energy independence” is a BAD thing because the oil companies operate for profit? (Maybe the energy companies should be nationalized — and oil and gas should be sold to U.S. consumers “at cost” — and then not invest our 401ks and pensions in energy stocks.)

As an aside: (from 2 months ago) "Fox News has officially criticized Obama for making gas prices too cheap. It marks the first day in which Fox News hasn’t criticized Obama for making gas prices too expensive."


  1. The Net Petroleum Exporter Myth


  2. Could we have gasoline at $1 a gallon within the next two years? Oil sold for $105 a barrel last summer, but now hovers around $60 today.

    (Naked Capitalism) -- The Financial Times reports that OPEC will not cut oil production, even if the price of oil falls to $20 a barrel. The Saudi oil minister said the world may never see $100 a barrel oil again. He said Saudi Arabia, and other Gulf oil producers, would be able to withstand a long period of low crude prices — largely because their production costs were so low (at only about $4 to $5 a barrel.) But US shale producers might still keep pumping oil at a loss, since they need to keep generating cash flow to service debt. Optimistic US producers will have to wait much longer than expected for their $100-a-barrel payday. It won’t happen overnight, but the combination of high debt levels, lack of access to cheap junk bonds, and a big fall in revenues, means the air supply of these producers has been cut in a big way.


  3. It’s not overproduction in shale fields, and it’s not global economic stagnation. It’s something far more threatening to Big Oil’s business model ... The reason for low oil prices: the complete collapse of Big Oil’s production-maximizing business model. With demand stagnant and excess production the story of the moment, the very strategy that had generated record-breaking profits has suddenly become hopelessly dysfunctional ... the recent price decline is expected to have only a marginal impact on global demand growth for the remainder of the decade ... oil prices will only average about $55 per barrel in 2015 and not reach $73 again until 2020 ... The oil industry is, of course, hoping that the current price plunge will soon reverse itself and that its now-crumbling maximizing-output model will make a comeback along with $100-per-barrel price levels. But these hopes for the return of “normality” are likely energy pipe dreams.


  4. Low Gas Prices = Spending or Saving?

    * Most analysts seem to believe that low gas prices should generate more consumer spending and growth; while some appear to disagree and say people will be saving more. Who's right?

    March 10, 2015 -- New York Times: "Sales dropped 3.1 percent in January, after a 0.9 percent December decline. The January decline was the largest setback since sales fell 3.6 percent in March 2009, when the country was mired in recession. January represented the fourth consecutive monthly decline. Despite the string of declines in sales, economists remain optimistic that sales will rebound in coming months as consumer spending gets a boost from falling gas prices and healthy job gains."

    March 9, 2015 -- NewsMax: “U.S. consumers are experiencing a substantial boost to real income growth, which is partly due to the better labor market and partly due to the sharp decline in oil prices.”

    March 2, 2015 -- New York Times: "The yardsticks for retail activity have been surprisingly lackluster lately. Even when the effect of lower gas prices and therefore less spending at service stations is stripped out, core retail sales were flat last month and actually dipped 0.2 percent in December."

    March 2, 2015 -- L.A. Times: "Consumer spending bounced back in January after taking into account sharply lower gas and energy prices."

    February 12, 2012 -- USA Today: "Americans aren't exactly rushing to the mall with their savings from low gasoline prices, raising questions about forecasts for a surge in consumer spending this year. Retail sales unexpectedly fell 0.8% in January."

    February 11, 2015 -- Bloomberg: "While a strong dollar may weaken exports, it also means cheaper oil, less costly goods from overseas and continued low inflation — all good things for an economy that’s powered by consumer spending.”

    January 24, 2015 -- Fox Business: "The plunge in fuel prices has been a relief across the agricultural sector, easing the pain of low grain prices for growers and boosting profits for cattle ranchers. Livestock producers in the Midwest and vegetable growers in the Sun Belt alike are already reaping benefits ... Consumers shouldn't expect to see lower prices at the supermarket, because transportation costs constitute only a small slice of those prices."

    January 14, 2015 -- New York Times: "Retail sales unexpectedly dropped 0.9 percent in December compared with the previous month, according to figures released on Wednesday, suggesting that falling gas prices and a brighter job market have yet to lift consumer spending."

    January 14, 2015 -- New York Times: "Many private economists believe the big drop in oil prices will provide a boost to the overall economy by giving consumers more money to spend on other products but they have cautioned that energy-producing regions could suffer from job cutbacks."