Bigger Than A Tax Cut

In a low growth world, where demand is seemingly flat and supply seemingly available, how is it the price of oil has fallen over fifty dollars per barrel in less than six months? From $107 in June to $64 in December, crude oil prices have tumbled. This is not good news.

Listening to experts or the conventional wisdom, one might believe lower oil prices are good for the economy. Under this rationale, consumers are spending less at the gasoline pump and therefore have more money in their pocket to spend on other items (presumably other consumer items). This is also referred to as the “falling oil prices are like a tax cut” reasoning, for leaving more dollars in your pocket effect.

Fortunately oil and the big business of oil is not so simple (or simplistic). The oil industry is big business not just for us in Texas, or even in the U.S., but worldwide. Oil is constantly being discovered as are new techniques to recover more oil from areas previously thought to contain less. The oil must also be lifted, transported or shipped to refineries. The variables are many and decisions must constantly be made with the primary determining factor being the price of oil. And now the price that was $107 in June is now $64 in December.

We have seen oil prices plunge before. In July 2008 oil was $147; in December $33. No that is not a typo. Oil prices bounced back over $70 within six months, creating the trading range and the relative calm that the oil industry has enjoyed these past few years.

Markets are markets and not every plunge is retraced. Oil prices were only able to reach a $114 high since 2008. In 1980 oil topped out at $37 and didn’t bottom out until 1998 at $11 almost twenty years later. The U.S. oil industry became a shell of its former self in those years. Oil never saw $37 again until 2003. Thank goodness other industries were there to take up the slack.

Texas and other energy-rich states have enjoyed an influx of new investment, positive net migration, and growth, largely due to an oil industry boom. It appears the boom may be over as prices continue to fall, leading to more tough decisions being made…each and every day.

An environment of Yes has quickly turned into an environment of No and I believe the effects will not only be felt in Texas, but across the entire U.S. economy, not to mention the world. Are we diversified in our growth industries? What growth industries? What growth, as we knock around in the slightly negative to slightly positive range before oil prices plunged?

Markets move and that is the important thing to remember. The oil industry has been huge in the U.S. these past ten years as investments of tens of billions of dollars and tens of thousands of workers can attest. It will likely take months to determine how many oil industry workers will be furloughed, how much investment will no longer be made and how much debt will not be able to be repaid. Activity is dependent on price. Things have changed and they will change again. The trends are sometimes very long in the making, as we have seen in the oil industry over the past forty-plus years.

The stock and bond markets are working on long-term trends as well. I believe the bond market trend ended over two years ago and stocks are in their final stages here. Markets can and do change. We will be watching.