June 25, 2015 - In the first half of this decade oil prices remained quite stable. In contrast, since June of 2014 costs per barrel have fallen more than 50% from their highs. There are a myriad of reasons for this, but a common theme is that we are in a slowing global economy, which in-turn creates a lower demand. We also saw OPEC keep production at high levels despite lower demand amidst already high surpluses of crude. This policy has proven to keep negative pressure on pricing.
Now, to the average consumer lower oil prices should be a good thing. Consumers get cheaper gas, and in theory cheaper goods and services! Well, the problem is that those goods and services often don’t get any cheaper. The savings from fuel prices don’t trickle down very far. For starters, consumer goods are typically distributed by diesel equipment and diesel prices haven’t decreased as much as unleaded gas. Some consumers might see a boost in household discretionary budgets, but for every action there is always an opposite reaction.
The hydraulic fracturing industry (aka “fracking”) has been instrumental in increasing oil production and US energy independence. However, for some firms the breakeven point in dollars per barrel was passed with oil in the $75-100 range. New well fracks have been decreased as the economies no longer make sense. With a lot of equipment still in the field, these companies need to generate revenue or preserve capital to make interest payments and have slashed spending on most CAPEX and instituted huge layoffs.
This year alone, oil and gas companies have accounted for 1/3 of the corporate-debt defaults worldwide. Companies like SandRidge Energy Inc., and Halcon Resources Corp. have had to issue new asset secured debt, which will make it difficult for unsecured bondholders to be repaid if the companies are in default.
Oil related layoffs are reaching 100,000 since the turn in oil prices. These oil jobs were good paying jobs, far above average labor or construction jobs with some paying $75,000 and more. Using an average of $50,000 in wages per year, 100,000 jobs lost translates to $5 billion in lost income to these workers.
Being able to go to the pump and keep an extra ten dollars is a huge win for the working-middle class, however the greater impact it has on the overall economy dwarfs the fact that you and I get to keep an extra ten bucks at the pump.