One of the biggest mysteries of the last quarter is why the economy seems so weak. Sure, Chinese economic growth stinks, and Europe continues struggling with its own problems, but none of that should have a dramatic effect on U.S. growth. More importantly, U.S. consumers should have a tremendous amount of increased spending power thanks to gas prices that are the lowest they have been in a decade.
Yet U.S. stocks are in doldrums and analysts are increasingly predicting at least a slim chance of a mild recession this year. The benefit to consumers from low oil prices does not seem to be having the expected positive impact. Economists first started noting that last summer, and as oil prices have continued to fall, consumers have gotten richer, but no less frugal. Related: BP Reports Huge Loss As Oil Slump Lingers On
The aggregate market valuation of all U.S. stocks is roughly $26 trillion. Energy stocks make up about 10 percent of that. Yet since November 2014, energy stocks have lost average of about half their total value. This $1.3 trillion hit to the overall market cap of energy stock companies has transferred wealth from oil producers to consumers. Despite that, low oil prices are now being seen as a negative for the broader economy.
To get another view on how massive the wealth transfer has been for consumers, think about how much oil is produced per day. Around the world, production was roughly 94 million barrels per day for 2015. This production level should increase modestly in 2016 according to the EIA. With oil prices now around $20-$30 a barrel compared to $70-$80 a barrel a few years ago, consumers are saving roughly $50 per barrel of oil per day. Running through the math, that totals almost $2 trillion dollars per year in wealth that previously was flowing into oil company coffers and now goes elsewhere. This price boon may not last forever, but with oil prices already lower for longer than many expected, guessing when prices will rebound is a risky game. Related: Why U.S. Shale Is Not Capitulating Yet
The new normal of low oil prices is paying off not only for consumers but also for companies in other industries like airlines and plastics. Dow Chemical for instance recently announced outstanding earnings helped in part by low crude oil prices which bolstered margins in its plastics business. Stock analysts have been falling all over themselves to upgrade companies like DOW as the shifting realities of the oil market are creating lots of opportunities. Even if oil does eventually spike back to prices over $80 a barrel, a very rosy forecast indeed, prices have now been low enough for long enough that firms like Dow have had ample time to hedge their production needs for years to come. Related: Oil Majors Converging Here Could Mean A New Hotspot
That truth underlines a reality that investors need to get used to. The world seems to have changed. Even if oil prices do start to rise again this year, for many companies, the damage is already done to their balance sheets. Firms will go bankrupt and nothing can stop that. A trillion dollars is a vast amount of money, and when that much wealth changes hands, invested capital has to be redeployed to remain efficient. It's impossible to say for certain, but that tectonic shift is likely what has caused recent economic weakness in the U.S. economy. Once the country finishes moving capital around and settles into the new reality of a riskier energy market, overall economic growth should start to pick up again.
By Michael McDonald of Oilprice.com
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Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance… More
Comments
Secondly the benefit to consumers takes a long time to filter through because first it benefits other companies in the chain who keep it to themselves for there own interests but it eventually filters through to the wider community, the consumer is usually the last to benefit. This is now begining to happen
Thirdly lower energy costs are never bad for the whole community in an economic sense
It may have a short term negative impact on clean energy industries and worst thing is goverments may see it as an opportunity to add more taxes. Hasn't happened yet
Your title is wrong. The gift is not from oil companies, the gift is from market.
Best regards,
Werner Casotti
Mendoza, Argentina
Clueless: No mention of the lost jobs directly in the oil and gas sector, the secondary supporting industries being hit, the effect on pensions and other long-range investment vehicles, the ripple coming to the junk bond marketplace (subprime 2.0 anyone?). This isn't a transfer of funds from the oil companies to the consumer, it's an evaporation of wealth from the fairy-tale world this author lives in.
Economics is not science. A scientist looks at the world and tries to find a theory to explain it, an economist (or finance PhD) looks at his theory and tries to explain why the world is wrong.
Money saved at the corporate level doesn't trickle down in the way you think it does in your mind. Employees are the first cut and when things get better there are always new people to hire usually at a lower wage.
You get paid to talk. I get paid to work. I can't afford their "gift". In this case you may be talking the talk but your ignorance is showing. I sure hope you have sense enough to get out of the rain.