Posted on 08/02/2016 4:28:47 AM PDT by HomerBohn
This wasn’t supposed to happen. The price of oil was supposed to start going back up, and this would have brought much needed relief to economically-depressed areas of North America that are heavily dependent on the energy industry. Instead, the price of oil is crashing again, and that is really bad news for a U.S. economy that is already mired in the worst “recovery” since 1949. On Monday, U.S. oil was down almost four percent, and for a brief time it actually fell below 40 dollars a barrel. Overall, the price of oil has fallen a staggering 21 percent since June 8th. In less than two months, the “oil rally” that so many were pinning their hopes on has been totally wiped out, and if the price of oil continues to stay this low it is going to have very seriously implications for our economy moving forward.
One of the big reasons why the price of oil has been declining is because the OPEC nations continue to pump oil at very high levels. The following comes from CNBC…
Production in July by the Organization of the Petroleum Exporting Countries likely rose to its highest in recent history, a Reuters survey found on Friday, as Iraq pumped more and Nigeria squeezed out additional crude exports despite militant attacks on oil installations.
Top OPEC exporter Saudi Arabia also kept output close to a record high, the survey found, as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.
These countries don’t know if or when the price of oil will eventually rebound, but what they do know is that they desperately need cash in order to keep their sputtering economies going. Many of these nations are already experiencing significant economic downturns, and substantially reducing oil revenues at this time would definitely not help things.
Here in North America, oil production costs tend to be higher, and so when the price of oil crashes we tend to see companies shut down rigs. But when rigs get shut down, that means that good paying jobs are lost.
During the first four months of 2016, approximately 35,000 jobs were lost at Texas energy companies. Globally, more than 290,000 energy jobs have been lost since the price of oil started falling back in 2014.
And even though there was hope that energy companies would add jobs as the price of oil started rebounding during the second quarter, it turned out that the job losses just kept on coming…
Energy companies continued to cut thousands of jobs during the second quarter, even though many chief executives are now voicing optimism that the oil market crash is ending and a rebound in drilling is afoot.
Although the heads of Halliburton Co. , Schlumberger Ltd. and other major firms forecast higher crude prices and a return to U.S. shale fields when discussing earnings this week, those companies and others disclosed another 15,000 industry layoffs.
Personally, I have quite a few members of my own extended family that live in areas that are heavily dependent on the energy industry, and three of them have lost their jobs so far this year.
And these are precisely the sort of good paying middle class jobs that we cannot afford to lose. In order to having a thriving middle class, you need lots of middle class jobs. Unfortunately, those kinds of jobs are going away, and the middle class in the United States is systematically dying.
If the price of oil keeps going lower, that will mean even more jobs losses for the energy industry, and that will be very bad news for the U.S. economy.
In addition, many of these energy companies are getting into very serious debt problems. Delinquency rates on corporate debt are already the highest that they have been since the last recession as firms struggle to pay their bills. Of course some of them have already gone belly up, and this has pushed default rates on corporate debt to the highest level since the last financial crisis.
At a price of 40 dollars a barrel, most oil companies in the United States are not profitable in the long-term. The longer the price of oil stays down in this neighborhood, the more energy companies we will see go bankrupt. At this point it is just a waiting game.
Also, it is important to keep in mind that Wall Street is very heavily exposed to the energy industry. Just as subprime mortgages brought down quite a few financial institutions back in 2008, so this time around it is inevitable that the oil crash will claim a fair number of victims as well.
As the global economy has slowed down, the demand for oil has decreased. And at this point, even the U.S. economy appears to be seriously slowing down. U.S. GDP only grew at about a one percent rate for the first half of 2016, and the rate of homeownership in this country just hit the lowest level ever recorded.
In the mainstream financial media, there is a lot of hopeful talk about a potential turnaround for the energy industry, but most of that talk appears to be just wishful thinking.
To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East. And of course that is definitely always a possibility considering who is running things in Washington. But absent that, it is hard to see the price of oil getting back to 70 or 80 dollars a barrel any time soon.
So that means that we are likely to see more job losses, more debt delinquencies and debt defaults, and more financial institutions getting into trouble due to their reckless exposure to the energy industry.
This is the real indicator of how bad the Obama economy is. Energy is the magic ingredient for producing wealth and prosperity. It is when energy is converted to goods and services that an end product of value is produced. The cost of energy has been cut in half during Obama’s presidency, yet growth has been stagnant. Any leader who can’t produce 4% or higher growth under those conditions is either an economic idiot or holding the economy down on purpose.
Oil price was lower last winter, $34.
I want a policy / process that will bankrupt the Saudis. I want them destitute and begging. I want their wells to dry up so that they all have to go back to being nomads.
Eliminate the cities, secure the oil fields.
Keeping that in mind, the pundits who had no idea that this was coming know exactly what will happen because of low oil prices, right?
I think not.
Good news for global stability though.
The Maduro regime in Venezuela will collapse.
Iran will have fewer resources for bomb-building.
The House of Saud will have less money to throw around the globe creating Sharia mischief.
I did not read the article. Anyone that thinks high oil prices are good for the economy has simply gone full retard.
Where is the BARF alert? When gas prices drop consumers have more discretionary money to spend on necessary new gutters, or a new mattress, we got a new retaining wall that replaced a crumbling one to keep our back yard from flooding. Being on fixed incomes you have to budget for these things, and when gas was over $4 a gal, all our extra money went in the gas tank.
It will take longer to hit food prices as producers are producing less.
Nope. I look at it the same as I do a tax cut - welcome relief.
But I'm sure it's only a matter of time before the oil companies are looking to Uncle Sugar for some handouts.
“So why is the rig count going up in the US? “
The normal time lag between prices and drilling.
Two months ago at $50/bbl, it was worthwhile to start some wells. Now at $40/bbl, fewer projects will get a green light, so when the rigs are done with what they are working, there will be less follow-on jobs.
The “shale Band” for prices is usually considered $45-65/bbl. As prices change, the lowest cost fields in Texas would be the last to stop and the first to start, while the highest cost major field, the Marcellus in Pennsylvania, would be among the last to rehire.
Technology has brought the cost to produce shale oil down somewhat, but Middle East producers have inherently lower cost to economically produce - under $10/bbl for some Saudi fields.
Total demand has to exceed their capacity for prices to sustain a rise in price. That will basically require the global economy to improve.
A booming economy under Trump will cause much more energy use to occur.
Our economy has bordered on a Great recession for 7.5 years.
I believe it could collapse if Hillary is elected.
Thank you.
I’ll second that.
I paid $1.69 a couple days ago.
I agree. A dose of Hillary, thanks to ignorant fools who are allowed to vote, will pound the nails in our coffins.
And that means people will be having more fun.
Possibly. Russia and Iran are also targets. Also simply to hold market share. If Saudi pulls back, the benefit of decreased supply accrues disproportionately to others.
You’re assuming that there will be a lot of money left after paying for fuel.
Not so.
Incomes have dropped dramatically since the one-time foreign aid student was elected by hook and crook and by many American voters.
Few budget as they see the central socialist government tossing money out the door like it was popcorn and believe that the corrupted Uncle Whiskers will take care of them.
“Lower prices are due to Saudi Arabia trying to run frackers out of business.”
It is true that they want that, and are trying to achieve that, but they are somewhat helpless to do anything else.
They have to pump, because they need the money. They are running big deficits trying to pacify their population with subsidies, and have been expending more on security with the war in Yemen. They have little else in their economy to rely on. They have been cashing in their US treasury bonds and overseas investments at a rapid clip.
As much as they would like to shut out American competition, they are more worried about Iranian competition, and the threat to their lives posed by a rich Iran. They are locked in an arms race with Iran, trying to siphon as much possible revenue away from Iran as they can.
OPEC has pretty much ceased to function as a mechanism to artificially inflate oil prices, because it always relied on the Saudis to restrain their production to do it.
The Saudis face a hard strategic situation - their oil may well be worth less in the future, so they need to monetize it soon. That is why they are looking to sell shares in the state oil company Aramco, and another big reason why they have to pump as much as they can now.
Their lowest cost fields are getting old, and their cost to produce is projected to creep up over time. Shale technology has rapidly lowered the cost to produce from shale, but only Americans are really doing it. In 5 or 10 years, huge shale deposits in Russia, China, Argentina and elsewhere could come into production as well, as the technology spreads. Solar cell and battery technology improvements seem on track to chip away at oil demand as well.
To drive oil prices back to sustained highs, it would likely require
- a significant global economic upturn (boom),
- an epic catastrophe in some producer nations, like a big war,
- or a massive government manipulation, like a big carbon tax (which would not help producers).
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.