While the stock market has been making new highs over the last few weeks, there is one sector that continues to drop… dare I say plummet!
In June, a barrel of oil cost $107, today (less than six months later) we are at $66 per barrel. That’s a drop of 38 percent.
This has certainly had a positive impact for us at the pump. Nationally, gas is at $2.72 while Georgia has an average of $2.65… and falling. To put that in perspective, in June, Atlantans were playing closer to $3.70!
This is wonderful for you and me as we are able to enjoy this drop in price when we’re filling up our cars… but what about the rest of the US economy?
Energy stocks have hit a brick wall. While many energy sector stocks were up around +15 percent this summer, they’re now looking at a minus 10 percent return for the year.
There are several reasons why we have seen oil prices drop since the summer. First, there has been lighter demand growth around the globe for oil. China and Europe’s slower economies haven’t been as demanding of “black gold” as they face slower growth in 2014. Second, there is a persistently higher supply right now due to new drilling technology, tremendous amounts of new oil supply found right here in America, and the Middle East oil power houses having decided to keep their output supply as-is.
In a much anticipated announcement on Thanksgiving Day, OPEC (Organization of the Petroleum Exporting Countries) decided not to cut their production targets. They, of course, could have chosen to stabilize the price by producing and exporting fewer barrels of oil per day… but that’s not how it played out. Why would they do this?
There are oil producers/competitors all over the world that can’t survive with oil prices much lower than they are today. The US’s new oil producers represent some of that contingency and there are many other international producers likely to decide to shut down higher cost oil exploration, as well.
Ultimately, I think the countries in OPEC (especially Saudi Arabia) are flexing their muscles in an effort to reassert themselves back into the director’s chair. Unfortunately for the Saudis, though, I just don’t see this playing out in the long run. They are just too dependent on their one trick economy. On top of that, low gas prices are good news for consumers and businesses here in the US.
Let’s circle back to the original question; are low oil prices bad for our economy? Is it bad for oil dependent companies?
Of course it is, at least in the short term. However, the major US oil companies have plans in place for situations just like this and are likely set to ride out this drop in prices. In the meantime, economic growth for the third quarter was actually revised up from 3.5 to 3.9 percent. That’s almost 4 percent growth! It’s easy to see where this comes from, as well.
For every $1 per gallon drop in prices at the pump, you and I are going to save about $1,000 a year on gas. Just think about how big a dent that is for a family bringing in $50,000 a year?! That extra money is going to get spent somewhere, whether it’s Target, Amazon, Delta, or even a neighborhood shop.
This is exactly why we have seen stocks for airline companies, retailers, and hotels rally as oil prices have dropped. It’s not just these guys that win when the cost of oil and gas goes down, though. Transportation actually gets a huge lift. UPS and FedEx rallied on the oil price drop, as well. The chemical industry, groups producing plastics, rubber, asphalt, paint and more, also saw an increase in value. Even agriculture got a bump.
While OPEC drops the price of oil around the globe, leveraged oil companies (the ones with the most debt) are no doubt feeling the pain. US oil stocks also get hurt (i.e. the recent pain we’ve seen in the stock market). However, while OPEC plays the waiting game with their competition, the US consumer economy should be getting a huge boost!
The energy sector makes up less than 10 percent of the S&P 500, so a fraction of the overall market is getting hurt. Meanwhile, many of the other nine sectors in the S&P (and don’t forget you and me) are likely getting a little relief .
Could this take out some of the most marginal, border-line energy companies across the globe? Yes. Could this dip hurt the junk bond market? To some extent, yes. However, the way I see it, for now the good outweighs the bad when it comes to low energy prices.
Certified financial planner Wes Moss offers financial and accessible investment advice to Atlanta Bargain Hunter readers.
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