Impacts of Falling Crude Prices
By Rick Welch on Nov 19, 2014
The impacts of falling crude oil prices could be significant for both the US and global economy in 2015 and beyond. The potential impacts are both positive and negative and could be far reaching. Why has crude pricing fallen so dramatically in 2014? We believe that the recent drop in oil prices (over 25% since the summer) is more related to excess supply than slowing global demand. Surging oil exploration and drilling in the shale formations across the US (primary locations are North Dakota and Texas) has been a game changer both here and abroad. Many of these formations present difficult drilling characteristics that before fracking made their exploration less profitable. Today, US companies are using fracking and horizontal drilling techniques to great success.
In just five short years, the success of fracking has allowed the US to make great strides towards becoming energy independent. Of the 77 million barrels of crude pumped each day, over 9.5 million barrels now come from the US - a status that may soon allow the US to supplant Saudi Arabia as the world's #1 crude oil producer. How is OPEC handling this change? Not so well. The big unknown this fall is how OPEC might respond to the deep drop in crude pricing. Though the energy field is tilting away from the cartel, as a group, it still produces over 40% of the world's oil. The disparate fortunes of various OPEC members will make the next scheduled meeting (November 27) of the cartel an interesting one. Some members will focus on protecting market share, while others will acknowledge that falling crude prices will soon be near or below their break even point. How OPEC responds could go a long way to determining the near term course of crude oil pricing. If the group decides to curtail production, oil prices could begin to rise and find some firmer footing. But if OPEC takes a hands off approach, then oil prices could conceivably keep falling, with a new floor as low as $70/barrel. Today, I heard an analyst suggest that the geopolitical risk premium has been recently removed as Libya (390,000 barrels/day) has increased production and the oil fields of southern Iraq (3.27 million barrels/day) have stayed out of the hands of ISIS. Previously, new or escalating conflict in the Middle East would roil the crude markets and allow OPEC to exert more pressure on pricing. An energy independent US changes the dynamics of the marketplace in ways not imagined just a few years ago.
What US sectors or industries will be impacted most by lower crude pricing? Any industry that uses crude oil or its derivatives as feed stock will see significant benefit. Industries like automobile, transportation, fertilizer, chemical and agriculture come to mind. Many manufacturing and retail businesses will also benefit indirectly from the lower cost of transportation both for raw materials and goods incoming and finished product and sales outgoing. If lower pricing becomes more permanent, we may see some re-evaluation of alternative energy sources, such as wind, solar and water. The US oil and gas sector may see a decline of as much as $20.0 billion from their collective bottom line (in their domestic operations) over the next 12 months. Do not worry, however, as it is not all bad news. As I read in a recent Forbes magazine article, much of the losses felt in Exxon's domestic operations will be covered by improved profitability in its international operations. As we saw in Exxon's Q3 results, "Exxon's downstream margins improved significantly during Q3 on lower benchmark crude oil prices and supplier discounts. Because of the sharp increase in crude oil production in the US, imports by the world's largest oil consuming nation have been declining recently. As a result, oil exporters like Saudi Arabia are looking for buyers elsewhere and offering discounts to benchmark prices in order to retain market share. This oversupply scenario is benefiting refineries in Europe and Asia because of which, Exxon's Q3 international downstream earnings increased by more than 100% year-on-year." To read more of this article please follow the link below:
http://www.forbes.com/sites/greatspeculations/2014/11/04/exxons-q3-earni...
The American consumer could realize significant benefit from falling crude prices in 2014 and 2015. The earnings erosion felt by the US oil and gas sector ($20.0 billion) could translate into $70 billion in savings for the American consumer at the gas pump in 2015. These savings could fuel additional consumer spending and add 1/4% to GDP in 2015. The increase in disposable income will directly impact the middle class which spends as much as 20% of their monthly incomes on gas. Some analysts have compared the expected savings to a tax break for the middle class, a segment of our population who still face stagnant wage growth and have yet to realize real benefit from the improvement in our domestic economy over the past five years. The timing of the recent pricing drop is in perfect alignment with the upcoming holiday season here in the US, with estimates of an additional $500 being spent (from savings at the gas pump) by the typical middle class shopper.
