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T. Henry

T. Henry

Mr. Henry recently graduated with a degree in finance and a concentration in portfolio management. He is a student of both technical and fundamental analysis.…

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The Real Cost Of Cheap Oil

The Real Cost Of Cheap Oil

Having a V-8 or even a V-10 engine powered car these days won’t break the bank for many consumers who have experienced a dramatic decrease in the price of oil from only a year ago. In fact in 2014, Americans drove an astounding 3.02 trillion miles motivated by the decline in oil prices that saw the national average for regular gasoline drop from $3.46 to $2.43 with many states below the $2 mark.

Besides consumers, many businesses have also saved significant amounts of expenses typically allocated towards transportation and manufacturing. In the airline industry for example, fuel costs make-up an average of 30% of an airline’s total expenses. Since the decline, household name, Southwest Airlines (NYSE: LUV) has seen its stock rise from $27 to 52-week highs in the mid-$40s. With all of the savings that consumers and businesses have experienced over the last year, many fail to see the negative effects of cheaper crude oil. These effects are important in order to understand the long-term impacts of this current oil market, as well as potential investment opportunities. Related: The Top 10 Largest Oil And Gas Fields In The United States

The first and most profound issue of cheaper oil is quite simply the associated environmental issues. The fact that Americans drove over 3 trillion miles in 2014, up 1.7% from 2013, shows that consumers have indeed been saving from oil expenses; however, many have not considered the pollution that all of this driving has generated. Each year, U.S vehicle emissions account for 30% of all U.S global emissions.

Because of the new disregard for fuel efficiency, nearly one million more vehicles were sold in 2014 than in 2013. With seemingly sustainable oil inventory levels, there may be potential investment opportunities in alternative forms of energy such as solar, natural gas, and coal. Environmentalists may not be happy with these statistics, but investors in the auto industry certainly wouldn’t mind. Related: Saudi Aramco’s Clever Strategy To Scoop Up America’s Best Energy Talent

Furthermore, the savings from cheap oil have not led to the economic output that many economists had hoped for. In only the past four months, planned layoffs in the U.S oil industry are approaching 100,000 with this number expected to further increase in the coming months. Just last week, nonfarm payrolls increased by a mere 126,000, the smallest gain since December 2013. Undoubtedly, the oil industry played a part in this disappointing jobs figure. Besides disappointing employment numbers in the U.S, major oil-producing countries around the world are also losers in this low oil price environment.

Countries such as Nigeria and Venezuela are two of the many countries that have felt the impact of cheap oil. In recent years, these two countries were able to increase market share and influence in their prospective regions, however in the past year, the oil decline has eroded the economies of these two countries. Related: Who’s To Blame For The Oil Price Crash?

Inflation is another issue at hand or in this case, lack thereof. Consumers typically view inflation as a bad thing because it denotes an increase in the general price level of goods. However in the U.S, sustained levels of low-inflation, combined with a strong dollar, can provide signs that an economy is weakening.

When consumers anticipate falling prices, or even sustained price levels, consumers don’t spend their money with the assumption that prices will be even lower in the future. Thus consumption, a major component of a country’s GDP, takes a hit and slows the growth of an economy. The declining price of oil is one of many reasons why inflation in the U.S is currently around 1%, as well as in the Euro region, China, and Japan. This alarming statistic shows that global growth is decreasing, which puts further downward pressure on the price of oil. It will be interesting to see how the central banks around the world handle the inflationary issues, which could impact the direction of oil.

By Henry T. for Oilprice.com

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  • JamesB on April 08 2015 said:
    Not sure the writer ever had a point. The real issue that everyone ignores is the high oil prices of the 2010-2014 period were artificial and caused by the Fed's free money QE programs. high energy and food prices (driven by the US ethanol program) coupled with the financial damage of 2008 have produced a weak and unstable economy world wide. Deficit spending masked the issue, but it is now coming home to roost. The artificial oil prices also allowed a new leap forward in oil and gas to be paid for and implemented on a massive scale shift in world supply and allowing Obama to retreat from reality. Obama's policies are allowing a wild fire to take hold in the Islamic world that will have huge repercussions. There is uncertainty everywhere and increasing instability. The drop in oil prices would have boosted the world economy 4 years ago, but not enough now. In truth, the oil drop is probably all that has stopped a second deep recession. in the future when the propagandists are put aside, this period will be considered the second Great Depression. The question now is will another world war follow it like 80 years ago?

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