Since the big drop after Thanksgiving we’ve been fed a steady diet of untruths about how positive the drop in crude is for the economy and consumers. The latter may be true as it starts costing less to fill up our tanks and we have ore discretionary income to spend, but the collateral damage done to corporations and nations has far-reaching ramifications.
The US has made tremendous strides in the exploration and discovery of oil and natural gas found in deep shale deposits. The dollars spent are enormous and the returns are sweet with oil at high levels. However, the big drop in crude-oil price makes new exploration projects more challenging, and many of these companies are debt-ridden. Given the price drop in crude, it stands to reason these companies will have to cut production and eventually their revenues will fall.
We’ve seen massive drops and bear market-type moves for big names such as RIG, ESV, HAL, PXD, EOG, MRO, APA, APC, OXY and many others. What took years to build in stock prices only took weeks to destroy.
Other countries are hurt by lower crude. Countries such as Venezuela, Russia, Iran, and others derive a great deal of income from the sale of crude. Weak demand means excess supply, excess supply means prices fall, and lower prices means less income. At some point there will be an equilibrium level, but clearly we have not arrived there yet.
As a commodity, crude oil plays an important role in the global economy. Yet when prices fall, as they are falling now, there will be winners and losers. The current situation is not unlike what we saw in 2007/08 when demand fell and in the late 90’s when prices fell due to oversupply issues (crude fell to single digits before President GW Bush was elected). At some point, there will be a balance, but, for now, supply is too much to overcome.
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