Business Day What’s So Bad About Cheap Oil? JAN. 17, 2015 Fair Game By GRETCHEN MORGENSON The sharp drop in oil prices will benefit American consumers, many of the nation’s businesses and the economy as a whole. So why are stock market investors behaving as though oil under $50 a barrel and gasoline prices hovering around $2 a gallon are bad news? The overall market’s recent decline reflects more than just the free fall in oil prices. Overseas economies are struggling; last week, the World Bank cut its forecast for global growth to 3 percent from 3.4 percent. But fears about losses emanating from a devastated oil patch have weighed heavily on broad stock indexes, investment strategists say. This response appears to be a case of investors seizing on the industry’s highly visible losers while ignoring the far larger number of winners. “The stock market has reacted negatively, and some of that comes down to the fact that you can see what the impact is on large energy firms,” said Paul Ashworth, chief North American economist at Capital Economics in Toronto. “It’s harder initially to see the positive impact that spreads around the rest of the economy. The big benefit to consumers is not as noticeable.” Since the beginning of 2015, the broad market averages have lost roughly 2 percent of their value. The collapse in oil company shares, of course, has been far greater. The Standard & Poor’s index of 80 oil and gas exploration companies is down 11.14 percent in 2015 and 35.4 percent over the last 52 weeks. The S.&P. index of six large oil services companies has fallen 5.2 percent so far this year, and 12.4 percent over the last year. Both indexes reflect the undeniable pain that oil and gas producers, their investors, suppliers, service providers, workers and lenders are going to feel. Layoff announcements, disclosures of capital spending cuts and falling rig counts are all highly visible to investors. So are anecdotal tales of woe from former boomtowns in North Dakota. Less conspicuous, however, are the winners in a world of cheaper oil, economists say. The good news is, they far outnumber the losers. David R. Kotok, chief investment officer at Cumberland Advisors in Sarasota, Fla., estimates that the economic output among oil companies and related businesses could decline by as much as $150 billion this year because of the oil price collapse. But an increase of about $400 billion is expected in other areas of the economy, he said. The net effect is double the annual value of the 2 percent payroll tax cut in 2011 and 2012, which provided a big increase to consumer spending. “The market’s first reaction to almost any shock is not to like it because it raises the uncertainty premium,” Mr. Kotok said. “Meanwhile, the beneficial effects happen over a longer period, when the change is perceived and anticipated to become more permanent. The difference between temporary and permanent may explain the behavior of the markets here.” To some degree, investors are operating in an information vacuum: They don’t yet have clarity on the full effects of under-$50 oil. News items about companies mothballing projects that are no longer economically viable have been common: Last week, for example, Royal Dutch Shell canceled a $6.5 billion petrochemical plant deal it struck with Qatar Petroleum in 2011. Still, few of the major oil companies — which must plan over a long time horizon, building in expectations that prices will eventually rebound — have disclosed their spending plans for 2015. One that has, ConocoPhillips, says it plans to invest $13.5 billion, a 20 percent drop from 2014. Much of that decline resulted from lower expenditures on unconventional energy projects, the company said. Another wild card in assessing the impact of the oil decline is the shale oil industry. Because the economics of horizontal drilling and hydraulic fracturing are not the same as those of traditional wells, it is unclear how investment and production in this industry will be affected by the price decline. Andrew Hunter at Capital Economics in London noted in an analysis last week that many shale projects had short-term variable operating costs as low as $20 a barrel. Production in such projects won’t necessarily be stopped just because oil prices have fallen to $45 a barrel, he concluded. Of course, a sizable reduction in the industry’s capital spending and the number of workers it employs is certainly coming. Total employment in the oil industry — including oil and gas extraction and support services — averaged 528,000 in 2014, according to Rigzone, an industry data provider. “My guess is that in 2014, energy companies spent over $200 billion, mostly on structures but also on equipment,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. He now expects that figure to fall by half or more. That’s not pocket change, but capital spending cuts will be small when set against the overall $17 trillion size of our economy. And even if the industry lost half its jobs — which it won’t — that would be equivalent to less than a single month’s gain for the overall economy, which added about 275,000 jobs a month last year. “That completely dwarfs any hits in the oil business, capital spending and oil services business,” Mr. Shepherdson said. Investors also seem to be ignoring the benefits of lower-cost oil to small businesses. In December, as the oil price was dropping, the National Federation of Independent Business’s optimism index returned to its prerecession average and rose to the highest point since October 2006. Owners of these businesses say they are increasing their capital expenditures this year. The N.F.I.B.’s most recent quarterly survey showed capital spending among these businesses rising to a seven-year high. This, too, will help offset the drop in oil and gas expenditures. The overall economic benefits of the collapse in oil prices are significant, Mr. Shepherdson said. He predicted that it could add almost one percentage point to real gross domestic product growth in the United States this year. In an economy trending at 2.25 percent annual growth, that’s a sizable gain. “The oil business and everything to do with it is a very small share of the economy,” Mr. Shepherdson said. “Could it possibly be more than 5 percent of G.D.P? No, and the other 95 percent of the economy is saying, ‘Thank you very much.’ ” A version of this article appears in print on January 18, 2015, on page BU1 of the New York edition with the headline: What’s So Bad About Cheap Oil?. Order Reprints| Todays Paper|Subscribe
Posted on: Mon, 19 Jan 2015 01:33:49 +0000
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