Let’s state the obvious, here: Things are not looking good for oil. Prices plummeted to 11-year lows yesterday morning, hovering around $35 per barrel — the lowest since 2004.
Oil firms have been slashing capital spending and jobs and cutting back spending on investment and exploration strategies. More than 200,000 oil workers have lost their jobs, and more than 60% of rigs have been decommissioned.
I’m always one for getting to the basics, so let’s do a quick amateur economics lesson.
Yesterday’s oil prices are the (unsurprising) result of a few different factors: increasing supply and decreasing demand.
The United States is awash in a supply of crude. Since 2010, oil production has drastically increased — almost twofold — from 5.3 million barrels per day to 9.6 million barrels per day (as of this past April).
Congress recently voted to repeal the peak-in-the-price ban on crude oil exports from the United States, increasing the global supply even further.
At this point, the world is oversaturated with oil, and conditions probably won’t turn around anytime soon, especially with Russia already in the market and Iran entering in 2016.
This massive supply of oil would be wonderful if not for the fact that demand for the slick stuff is rapidly decreasing. Vehicles are becoming more energy efficient, and global economies are weak.
To compete with the plethora of competitors, oil producers have had to lower prices, hence the sort of numbers we are seeing now.
Even further, climate talks in Paris have many people believing that we will soon see the end of fossil fuels, and the majority of commodity experts can barely conceal their hopelessness.
The only saving grace of the entire scenario is that we’re seeing prices slide throughout all commodities.
On coal, there are more than a handful of reports declaring that “the golden age is over. Coal is dead and will never come back.”
Most analysts don’t see the oil situation turning around anytime soon either, especially with a dysfunctional OPEC spiraling further out of control. We’ve observed no efforts by the Saudis to change the price trajectory.
“With OPEC not in any mood to cut production… it does mean you are not going to get any rebalancing any time soon,” Energy Aspects chief oil analyst Amrita Sen said.
One Fortune article states, “There is so much crude out there we’ve run out of places to put it.”
The Bright Side
Even if you’ve paid zero attention to OPEC or oil prices, I’m sure you’ve noticed the drop in prices at the pump.
The national average for regular gas has fallen from $2.70 last year to $2.03 per gallon today.
According to the United States Energy Information Administration, households are likely to spend $750 less on gas this year thanks to oil prices.
There are mixed reviews from here on out, but most signs point to the fact that low oil prices are significantly boosting American consumption overall.
Researchers at the JPMorgan Institute examined spending data from one million of the bank’s credit and debit card customers. After categorizing those customers based on average fuel consumption, their findings were rather interesting:
“The researchers found that for every extra dollar those in gas-guzzling neighbourhoods saved at the pump, their spending elsewhere rose by 73 cents. This increased to 89 cents after adjusting for the fact that fuel is more likely to be bought with a debit or credit card than other expenses.”
This is contributing to a few trends, including increases in miles driven (up 3.4% from last year). That means Americans are taking longer and more frequent trips — in the air and on the ground.
Airlines are expecting to finish the fiscal year with record profits. With fuel accounting for 30% of airline costs and the bill for that fuel plummeting by $88 billion throughout 2015, consumers can expect to see more affordable flights. (A nice treat, especially during the holiday season!)
Over the past four quarters, spending in the service sector has been stronger than any year since the recession.
Naysayers on the topic of increased consumer spending often refer to the shadow of the recession, as well as the looming debt that burdens most Americans.
Sure, we can’t deny the impact of the recession — it was a definite confidence killer for the majority of consumers. Saving and financial security are usually priority over luxury spending. And yes, most Americans are now more conscious of their carbon footprints, so auto sales aren’t seeing the usual boost that parallels general consumer spending increases.
However, all signs are pointing to the fact that oil prices will remain this low (if not lower) for many years to come. As long as production continues at the current levels, prices will remain low.
Goldman Sachs has already forecast $20 barrels in the future, and almost every major analyst is telling investors to sell, sell, and keep on selling.
But those analysts with more of a bold streak will tell you that this might just be the most opportune (albeit laughable) time to buy.
The history of oil is full of booms and busts, so I would hesitate to completely write it off just yet.
Remember the wise words of our friend over at Berkshire: “Be fearful when others are greedy, and greedy when others are fearful.”