Saudi Arabia to lower oil prices, the houston boom is over

There's commentary indicating the slowdown in oil & gas industry and the related multiplier and indirect ripple effects outweigh the potential increases in consumer spending and its related multiplier effect & job creation (i.e., some more retail jobs).

 

You're ignoring two significant points.

When a commodity that is flat rate across all classes changes in price, such as fuel, it affects the poor class the most. $80 to someone who makes 16k a year is quite a bit more significant than to someone making 100k a year.

Oil is a bubble right now. All bubbles pop. Anyone chasing the bubble will always end up hurt. Pretty much everyone in the industry knows its going to crash. Most know they are going to end up on the unemployment line sooner or later, and they are there to make good money while its hot.

 

No. Demand for gasoline goes up. Ethanol, derived from food crops, is blended into gas and raises the cost of food. Simple minds, simple models.

 

Of course they aren't going to pay off their mortgages or student loans quicker - people generally don't think that way. They are going to go out to eat more. They are more likely to buy a new phone or TV. Or travel for vacation since it's cheaper to drive or fly somewhere. Whatever they spend it on, it boosts the economy in any number of different industries.

$100/month may be nothing to you or me. But it's certainly a lot to a person who lives paycheck to paycheck. And $100/month for 200 million people is a lot for the economy. If you give the American people an extra $200 billion, what do YOU think they will do with it? Spend it, or hide it under a mattress? As long as they are spending it something, they are boosting the ecoonmy. And that's assuming the only money they save is on gas. CPI went down 0.4% in December. That means everything else they spend money on is getting cheaper, which means even more opportunity to buy more things.

It does - and that sucks. But paying higher prices for things unnecessarily to employ people is a terrible and inefficient idea. Do you think you should pay more for food to employ farmers? Do you think you should pay more for health care to employ doctors? Why would we thinking paying more for gas simply to employ people is a good idea?

It's like people have just forgotten all the basic concepts of economics.

 

This is theoretically possible, and in a full-employment economy, I would tend to agree since creating more low-paying jobs without having people to fill them would be inflationary. But when there's a large number of unemployed people, I think it's generally accepted that two $50k jobs is going to create a larger net effect than one $100k job.

 

So you think people living pay check to pay check are going to take vacations saving less than 100 bucks a month? Wow. Oh, and if we pay less for food and healthcare and unemploy thousands(which it wouldn't) in that field forcing them to collect unemployment while people get to reap the benefits of cheaper corn and lab fees for a few months are going to boost the economy so more people living pay check to pay check can go to sandals or where ever and live it up? Gotcha. That clearly is a win win for the US economy. Glad you see the big picture...

 

Here's an analysis from 2012 on oil price shocks. Here's the projected employment impact from a 25% increase in oil prices:

Figure 4. Estimated Employment Response to a 25 Percent Increase in Crude Oil Prices, 2012



Now reverse that and all those states in red would benefit if you go the other way and drop oil prices. Outside of Texas, every other state negatively impacted is a fairly small one, while all the other large states benefit.

Lots more info at the link:

http://www.cfr.org/united-states/sh...-states-economic-gains-vulnerabilities/p31568

 

I'm saying there are 300 million Americans that benefit from this. Lots of them will take vacations. Is this really that hard to comprehend that if people have more money in their pocket, they will do things with it? Are you arguing otherwise? Again, if you put $200 billion in the pockets of Americans, where do you think that money will go? Why do you avoid that question?

So lower oil prices causes unemployment in the oil industry, but lower food prices doesn't cause lower unemployment in the food industry? How exactly do you think farmers keep getting paid the same amount if they get less for selling their goods?

Are you actually trying to argue that higher costs of goods is good for an economy? Do you know anything at all about economics? This is not complicated stuff.

 

So about 666 bucks extra per American is going to drastically and permanently change the economy? Did you add in the money lost per job lost due to this as well? Broken families, many going on govt support and such... Really, how much is it benefiting?

Subsidies I guess, it was more of a hypothetical ...last time I checked oil companies didn't get them. I dunno, do they?

Nice...I'm just ignorant I guess. I suppose the Texas economy means nothing to you. You do realize that the article you posted said the Texas economy benefits from the oil boom, right? Meh who cares about the state we Rockets fans live in...where do you live by the way?

 

Someone didn't get their Christmas bonus

 

did you just admit that he may be right, and that you dont really care though because at how it will effect the oil industry in texas?

 

Repping Major for reiterating all of these basic economic concepts I'm studying for my CPA exam. Really this while thread is full, for the most part, of good conversation. Learning quite a bit on how the oil industry is affecting everyone.

 

Here's the commentary, just FYI. I'm not arguing either way, just food for thought.

"What a difference just a few weeks makes. As recently as early fall, everything was pretty hunky dory. The national economy appeared to be gaining momentum with the great help of the oil and gas industry. Flash forward to January 1, 2015 and it looks like the wheels have fallen off the oil and gas boom. The price of oil is down 50% in almost the blink of an eye. 50%! We might have to call that material.

Every material change in such an important part of economy will obviously have some pretty dramatic consequences. No question there will be challenges to all oil-centric geographies. The good news though is that lower gasoline prices will act like a tax cut and spur consumers to spend more, driving growth in other parts of the domestic economy. At least that's the conventional wisdom. How about we play with some numbers?

A $1.50 a gallon decrease in the cost of gasoline for the average driver that drives 13,476 miles a year (Federal Highway Administration) in a 20-mpg car (22 for cars and 17 if you include trucks, FHA) turns into about a $1,000 annual savings. Multiply the annual savings by 220 million drivers (FHA) and the US economy is about to get a $220B stimulus from cheaper oil. Economic science tells us that not 100% of added discretionary income turns into consumption, so just for fun let's say it's 90%. That provides the US with a stimulus of $198B.

What about heating oil, another major use of oil? The latest data we can find from the US Energy Information Administration comes from 2010, when consumers spent $14B on heating oil. That amount really isn't too material given that in the same year $376B was spent on gasoline. If this relationship remains similar, then we should add another 4% to consumer's $198B savings in gasoline. That takes the "tax cut" up to about $206B.

But how much of a decrease are we going to see in capital spending in the energy industry? In early 2014, the Oil & Gas Journal predicted domestic oil and gas spending last year would hit $338B. A recent research piece by seemingly in-the-know energy securities firm Tudor, Pickering, Holt & Co. suggests energy capital spending in 2015 may be down over 40%. Yes, you read that right, a 40% reduction in energy capital expenditures. Assuming Oil & Gas Journal's 2014 prediction proved to be in the ballpark of expenditures in 2014, a 40% reduction in 2015 would remove $135B from our national economy.

Simple math with this simple analysis would tell us if we have a $206B stimulus from lower gasoline and heating oil prices offset by a $135B decrease in overall energy capital expenditures, then net net we get a $71B "stimulus." Woohoo, we're in the chips now! But then...

It's hard to find any worthwhile data on the economic multiplier effect of capital expenditures versus consumption, but India's National Institute of Public Finance and Policy suggests the economic multiplier effect of capital expenditures is 2.45. That would mean capital expenditures waterfall down to increase economic activity by 2.45 times their amount. If true, that means our real economic shortfall from a $135B decrease in energy capital spending is equal to taking $330B out of the economy, to be covered by $206B in "stimulus." Ugh, now our economy is in the hole $124B!

Of course there must be a multiplier effect on the $206B increase in consumption. To date, we at [executive search firm] haven't found one. But when the average driver has an extra $80 in his pocket each month, one would think a lot of that money will be spent on a slightly higher quality of beer and cigarettes - hardly the economic multiplier of capital investment. And, guess where a lot of consumer products are made...not in the USA.

Hmmm...would the fact that China's economy is slowing down as it shifts from infrastructure investment to consumer spending tell us what we might expect here?

Any of you smart readers out there want to take another look at this analysis? We'd be happy to report it in our next TLV.

A year from now, we'll see how this all shakes out, but we must keep a watchful eye in 2015 because any material change like this is bound to have rather material consequences for both the domestic and global economy."

Happy to share with you the monthly newsletter to sign up for. It's pretty solid.

 

But did you also say earlier that higher oil prices is indicative of a recession? That doesn't sound right.

 

This is the question I have been asking. In downtown Houston, London, Abu Dhabi, Moscow there are office buildings full of people with supercomputers watching every tick of consumption and production, buying and selling futures; why wasn't there a gradual decline in oil prices over many months rather than the steep sell off we saw? Companies should have been tapering back production and expenses rather than having mass lay offs.

I'm pretty sure it's the same panic effect as the rapid price rises where speculators gambling on massively leveraged positions having to over react to change (leveraged change?) where a slight spook in the herd leads to a stampede. (http://www.nytimes.com/2012/04/11/opinion/ban-pure-speculators-of-oil-futures.html)

Here's an article from June that predicted it though:
http://www.forbes.com/sites/jesseco...sons-why-oil-prices-may-be-headed-for-a-bust/

 

I think the guy makes two big mistakes. One is glossing over the multiplier effect of consumer spending and simplifying it down to things like higher quality beer. That's just silly. That money immediately circulates and recirculates throughout the economy. We don't know what the multiplier specifically is, but we know it's significant and real.

Second, it ignores all the secondary savings from oil prices dropping - lower inflation (or deflation) of other goods and services. For example, airline tickets dropped 5% last month. How much additional savings do you have there? Repeat this across every industry that benefits from lower oil prices and you have a much larger net impact on everyday spending.

To clarify, recessions lead to lower oil prices because of lower demand for gas (as we saw in 2008). High oil prices cause fear of a coming recession because it leads to lower consumer spending and higher prices. That's why there's always panic over the idea of $5 gas prices. So the opposite is also true - lower gas prices leads to higher consumer spending and lower prices, both very good things for the consumer.

In general, if the lower oil prices were because of weak demand, that would be an indication that the global economy is slowing. So it serves as a self-correcting mechanism by then boosting consumers. But in this case, much of this price drop is due to increased supply. That's an entirely different scenario with different dynamics.

Oil prices can be a predictive leading indicator, but it depends on whether it's supply or demand driving the story. Oil prices also have an actual effect on the economy, but that's more of a lagging effect - and is less affected by whether it's a supply or demand issue.

 

This has been the Federal Reserves position on inflation for the past 6 years.

 

Oil prices *were* dropping for several months. But oil is priced based on expectations of future supply and demand, not the current one. And the assumption was that OPEC would reduce supply to try to hold prices up, so the drop was controlled and steady. It was when OPEC announced that it would not cut back supply that everything went to hell. Notice it had already started dropping around July, but things didn't accelerate until more recently:



The reason for not tapering instead of mass-layoffs is that hiring and layoffs are a tedious process. If the drop was only temporary, then you want to just ride out the storm so you don't have to just hire a bunch of new people a few months later. It wasn't until people felt like this was going to be a longer-term thing that they finally gave up and had to start letting people go.

 

You must work in the energy sector?

This is not about not caring for the Texas economy. Its about the reality of the situation.

Up coming busts are pretty easy to spot. The challenge is knowing a budding boom and when the bust is coming.

 

Major, just to illustrate what the Fed is concerned with, it is mainly the consumer prices.



Below 2% the Fed thinks the economy is not healthy. I expect somekind of drop in the CPI due to oil prices, but it is likely that the decrease in prices in the CPI could lead to higher demand and high inflation.