Friday, December 12, 2014

Why is Low Oil a Bad Thing?

Oil is center-stage in the news again. However, it is because oil is falling. Prices for oil has fallen through the $70's and the $60's since Thanksgiving. Some days, the price has fallen more than 5%.

Now, why is cheaper oil a problem?

Sure, consumers will be paying less at the pump. This will translate into more consumer spending and more profits for companies, especially retail. Airlines have seen a boost in their stock price as the Ebola scare disappeared and the start of cheaper oil produced good gains. The automotive industry will probably see an increase in the sale of SUV's and trucks. By January and February, we will see how the cheaper fuel costs will help the margins for these companies.

Across the world, major oil producers have not backed down to reduce their supply of oil that is produced. Reducing the supply across the board would create more demand and cause prices to rise. OPEC, Saudi Arabia, and U.S. shale companies all have publicly stated that they will not reduce their supplies.

In my opinion, it really it the wide-spread of oil that will affect many industries poorly and drag the markets down. Railroads will look less attractive as supplies can be moved via air or in trucks. Alternative energy companies will be hurt as people can validate the use of gas over a more expensive alternative in solar or wind. Similar to a benefit, automotive companies that have invested heavily in hybrid cars will probably see less people buying this type of car (so possible great deals for them!). Tesla (automotive) and SolarWinds (solar panels) will also be hurt by this.

Countries that rely on oil for a larger percentage of their GDP may have to start moving more oil to make up the difference. Two examples of these countries are Venezuela and Saudi Arabia. As these countries economies hurt, it can drag down their trading partners and have a global effect. There is some skepticism that the move by Saudi Arabia may be a move to hurt some of their partners in OPEC so that the nation can increase their profits in the future. Likewise, many smaller U.S. shale companies could be in danger of bankrupting. The large players in oil, Shell; Exxon Mobile; and BP, may make moves to buy out some of their competitors.

Where is the bottom? At some point, these suppliers will have to stop driving prices down and bring oil back up. Some experts have said we might see oil fall somewhere between $35-$45 a barrel. Trading wise, I will not necessarily like to see the market fall into a correction. Personally, I will enjoy the extra spending money by saving at the pump. :)
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