The Price Of Oil Is Crashing Again, And That Is Very, Very Bad News For The U.S. Economy

LC News Group ^ | 7/2/2016 | Michael Snyder

[HomerBohn]

This wasn’t supposed to happen. The price of oil was supposed to start going back up, and this would have brought much needed relief to economically-depressed areas of North America that are heavily dependent on the energy industry. Instead, the price of oil is crashing again, and that is really bad news for a U.S. economy that is already mired in the worst “recovery” since 1949. On Monday, U.S. oil was down almost four percent, and for a brief time it actually fell below 40 dollars a barrel. Overall, the price of oil has fallen a staggering 21 percent since June 8th. In less than two months, the “oil rally” that so many were pinning their hopes on has been totally wiped out, and if the price of oil continues to stay this low it is going to have very seriously implications for our economy moving forward.

One of the big reasons why the price of oil has been declining is because the OPEC nations continue to pump oil at very high levels. The following comes from CNBC…

Production in July by the Organization of the Petroleum Exporting Countries likely rose to its highest in recent history, a Reuters survey found on Friday, as Iraq pumped more and Nigeria squeezed out additional crude exports despite militant attacks on oil installations.

Top OPEC exporter Saudi Arabia also kept output close to a record high, the survey found, as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.

These countries don’t know if or when the price of oil will eventually rebound, but what they do know is that they desperately need cash in order to keep their sputtering economies going. Many of these nations are already experiencing significant economic downturns, and substantially reducing oil revenues at this time would definitely not help things.

Here in North America, oil production costs tend to be higher, and so when the price of oil crashes we tend to see companies shut down rigs. But when rigs get shut down, that means that good paying jobs are lost.

During the first four months of 2016, approximately 35,000 jobs were lost at Texas energy companies. Globally, more than 290,000 energy jobs have been lost since the price of oil started falling back in 2014.

And even though there was hope that energy companies would add jobs as the price of oil started rebounding during the second quarter, it turned out that the job losses just kept on coming…

Energy companies continued to cut thousands of jobs during the second quarter, even though many chief executives are now voicing optimism that the oil market crash is ending and a rebound in drilling is afoot.

Although the heads of Halliburton Co. , Schlumberger Ltd. and other major firms forecast higher crude prices and a return to U.S. shale fields when discussing earnings this week, those companies and others disclosed another 15,000 industry layoffs.

Personally, I have quite a few members of my own extended family that live in areas that are heavily dependent on the energy industry, and three of them have lost their jobs so far this year.

And these are precisely the sort of good paying middle class jobs that we cannot afford to lose. In order to having a thriving middle class, you need lots of middle class jobs. Unfortunately, those kinds of jobs are going away, and the middle class in the United States is systematically dying.

If the price of oil keeps going lower, that will mean even more jobs losses for the energy industry, and that will be very bad news for the U.S. economy.

In addition, many of these energy companies are getting into very serious debt problems. Delinquency rates on corporate debt are already the highest that they have been since the last recession as firms struggle to pay their bills. Of course some of them have already gone belly up, and this has pushed default rates on corporate debt to the highest level since the last financial crisis.

At a price of 40 dollars a barrel, most oil companies in the United States are not profitable in the long-term. The longer the price of oil stays down in this neighborhood, the more energy companies we will see go bankrupt. At this point it is just a waiting game.

Also, it is important to keep in mind that Wall Street is very heavily exposed to the energy industry. Just as subprime mortgages brought down quite a few financial institutions back in 2008, so this time around it is inevitable that the oil crash will claim a fair number of victims as well.

As the global economy has slowed down, the demand for oil has decreased. And at this point, even the U.S. economy appears to be seriously slowing down. U.S. GDP only grew at about a one percent rate for the first half of 2016, and the rate of homeownership in this country just hit the lowest level ever recorded.

In the mainstream financial media, there is a lot of hopeful talk about a potential turnaround for the energy industry, but most of that talk appears to be just wishful thinking.

To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East. And of course that is definitely always a possibility considering who is running things in Washington. But absent that, it is hard to see the price of oil getting back to 70 or 80 dollars a barrel any time soon.

So that means that we are likely to see more job losses, more debt delinquencies and debt defaults, and more financial institutions getting into trouble due to their reckless exposure to the energy industry.

[HomerBohn]

Good idea. Perhaps a Conservative advisor (one not a member of CFR)to President Trump will advise that this be done.

Meanwhile, I can think of two oil companies that sell only U. S. fuels at their station: Murphy USA and Valero.

[Dacula]

Georgia just instituted a new gas tax last week and the cost of gas went up overnight by .25 a gallon.

We went from $1.75 to $2.00 a gallon. Got to pay for all those toll roads that they building here.

[HomerBohn]

No. I stated 8 cents.

[Texas resident]

Post of the year.

I hope Mr. Trump reads your post and uses it word for word.

[central_va]

I was just quoted $1.79. So it is 79% more for propane in VA than MN. THAT MAKES NO SENSE. This why the energy sector loses the trust of the American people.

[PapaBear3625]

All these people hallucinating future trade wars when we’re in the middle of one. OPEC is determined that the USA will not have a powerful energy complex.

Their oil will not last forever. That's why they are pushing their underclass to move to the US and Europe, to reduce economic pressure on Muslim states.

[Tax-chick]

Every time the price of gas gets low, the NC legislature discusses raising the tax, just because they figure they can get away with it. Since it's a per-gallon charge, they get more revenue from it with gas prices low ... but hey, you can always shaft the citizens a little more ...

Got to pay for all those toll roads that they building here.

LOL - good one.

[xzins]

Lower prices are due to Saudi Arabia trying to run frackers out of business. That’s the bottom line.

[Rome2000]

Bomb the oil fields in Saudi, Iran, and Venezuela.

Problem solved.

[Eric Pode of Croydon]

Back when gas was $3.75 a gallon, and every waitress in North Dakota was driving a new F-350, I sucked in my gut, broke out the red pencil, and figured out a way to keep my business alive.

In particular, one thing I did NOT do was whine to the government, demanding protection for my business model.

What goes around, as they say, comes around.

[MeneMeneTekelUpharsin]

Don’t fuel prices generally fall right before Presidential elections, especially if Democrats are in power to keep the electorate happy?

[nathanbedford]

But overall, the lower the cost of energy, the greater the ability of our economy to grow.

Indeed, a reduction in the price of oil is analogous to a tax cut. It might be argued that it's been the decline in the price of oil that has staved off recession.

I am not clear whether it is a surfeit in the supply of oil resulting from Iran coming onto the market and going into head-to-head competition with Arabia in a context of American fracking, or whether the slowdown in China and elsewhere has driven down demand, or all three which have brought oil down $40 a barrel.

Whatever the cause, the effect on Vladimir Putin is devastating. Think of Russia as a giant gas station which requires $80 a barrel oil in order to filter money down through the apparatchiks to sustain the present regime. Workers at the Salzburg airport will tell you that when oil went down Russian tourism infamous for its profligacy came to an end. $40 a barrel oil will do more for America's relative standing compared to Russia in the world than all the red lines ever drawn by Brack Obama.

There is very little to see that is not positive in $40 a barrel oil.

[MeanWestTexan]

Pretty much everything in your post is wrong.

First, producers are upstream of the pump and sell their crude way before, generally at the wellhead.

Second, countries are members of opec, not producers. The USA is not a member country.

Third, price is set at what is essentially an auction, just like stocks and most big commodities. No one except maybe Saudi has the ability to lower or raise the price by increasing or decreasing supply, and it comes at a loss of either market share or price, respectively.

[Roccus]

I’ve only been buying bulk delivered propane for 15 years and have NEVER seen it below $1.00 here in North-Central WV.

Without the summer fill-up discount, it would be the exact same price I paid in January...$1.935.

[P.O.E.]

Predatory pricing from a predatory people.

[P.O.E.]

Predatory pricing from a predatory people.

[Graybeard58]

No. I stated 8 cents.

#############################

No, in the first paragraph you stated 8 cents. In the third paragraph you stated .08 cents.

Maybe you meant $.08 in the third paragraph.

[Mich Patriot]

I’m right there with you as well. Also, the ‘broken window fallacy’ comes to mind here. While the oil industry may lose jobs (at least temporarily), consumers have more money to spend elsewhere, supporting or increasing jobs in other industries. Thanks ECON 101.

[central_va]

We learned in WWII that bombing oil fields is not real easy. It is hard to hit oil pipes from the air. They are not a big target. Look up Ploeste Raid.

[Roccus]

See my #54