Falling Crude Oil Prices: A Boon or A Bane?
The price for crude oil has been consistently falling for well over a year now. Most consumers feel that this is a good thing because it saves them money and increases their disposable income. However, what does this mean for local and global economies in the long term? Here is a chart showing the price of Crude Oil Futures over the last one year.
Impact on Gas Prices
According to EIA’s latest Gasoline and Diesel Fuel Update, crude oil prices make up 42% of the price of gasoline. The rest of what we pay at the pump depends on taxes, distribution & marketing, and refining. Therefore, a fall in the price of crude oil translates to a fall in the price of gas and vice versa. This is better explained in the graphic below:
Impact on Consumer Retailers
Since Texas is the top producer of oil in the United States, it has been severely impacted by the slump in oil prices. 60,000 jobs have been cut by oil exploration and production companies in Texas so far. This trend is likely to continue in the near future. This would translate to people having less money to spend in stores. On January 15, 2016 Walmart (NYSE: WMT) announced that it was closing 269 stores, more than 10% of which were located in Texas.
Impact on Global Economy
The Organization of Petroleum Exporting Countries (OPEC) has 12 members which control 61% of the world’s oil exports. OPEC said recently “the overall negative effect from the sharp decline in oil prices since mid-2014 has outweighed benefits in the short term”.
The global demand for oil is falling because consumers are cutting back on car transport. However, OPEC members are still supplying the same amount of oil to the world because they don’t want to see their market share drop. The other factor impacting the price of oil seems to be market sentiment. OPEC members include: Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Qatar, Indonesia, Libya, UAE, Algeria, Nigeria and Angola. The president of Venezuela has announced an economic state of emergency and Nigeria has asked for $3.5 billion in loans from the World Bank and the African Development Bank. Saudi Arabia and Russia are not in good financial positions either. If countries which are dependent on oil exports alone go bust as a result of falling oil prices, the IMF and World Bank may not have money to bail them out.
Impact on Stocks
Upstream oil producers are feeling the maximum pinch because their costs to produce oil exceed the market price. Hence, they end up with incurring huge losses. Here is a chart for the stock price of Anadarko Petroleum (NYSE: APC). About a year ago, the price was over $80 per share. Currently, it’s trading at $37.51 per share. This seems to be the trend among other companies in the industry such as Transocean LTD (NYSE:RIG) and Nabors Industries Ltd. (NYSE:NBR):
Falling oil prices aren’t bad news only for the oil exploration companies. Industrial and materials companies such as United States Steel Corp. (NYSE:X) are being impacted and so are financial companies. Companies such as United States Steel Corp. (NYSE:X) supply materials to oil and gas companies to build their infrastructure. Finance companies lent huge amounts of money to exploration companies as capital when the demand for oil was high.
Even though it may feel great to pay less than $1.45 for a gallon of gasoline to the average consumer, there are bigger factors at play. This decline in the price of oil has resulted in hundreds and thousands of people losing their jobs and entire countries are at the brink of failing.