This dramatic fall in gas prices between my fill-ups was not all that much of a shock to a student of financial markets such as myself, who have been tracking the 57% decline in oil prices over the past six months. Although myself, and more importantly, my commuting comrades have been jumping for joy over these cheap oil prices, there are an increasing number of economists who have been rumbling over the problems of cheap gas.
Common thought says that as consumers have to spend less and less on filling up their tanks, they are free to spend more on other goods. Money that would have gone into the gas tank and out the exhaust pipe is now able to find its way into the hands of the discretionary economy. Families can now afford to go out to dinner. Travel is now suddenly more affordable. Extra gas cost savings can be squared away for larger purchases: a new grill, a new car, possibly even a new house.
Isn't this all good? Those economists are probably just off their rockers, they cannot possibly think that this is bad? Can they?
Well it turns out that they can.
In a recent fourth quarter earnings preview for the Wall Street Journal, WSJ Markets Reporters Dan Strumpf, Saumya Vaishampayan, and Alexandra Scaggs discuss the impact that sliding oil prices are expected to have on earnings reports. The article Oil to Put Chill on U.S. Earning Season begins with the potentially ominous opening:
As fourth-quarter earnings season gets under way, investors are bracing for the softest U.S. profit growth in years, pinched by collapsing oil prices and a strong dollar. That double whammy, coupled with the highest valuations for stocks since the financial crisis, will test the market's ability to prolong its extended bull run and will likely make for continued bumpy trading in the weeks ahead.The group goes on to explain that much of the weakness in earnings can be attributed to the rapid fall in oil prices, which has pushed oil companies expected earnings down by 19.1% during the fourth quarter.
As much as it is common thought that consumer discretionary spending spike as the result of less gas expenses is a good thing, it is just as agreed that a stock market collapse is just as bad, if not worse. It is important to point out that these are earnings expectations, which can easily surprise to the up side. But they are just as easily able to surprise to the downside, which may come to fruition as the severely rapid losses in oil companies might outweigh the gains from companies which count gas and oil as major cost drivers. With valuations and volatility at recent highs, and investors looking to jump ship at the soonest sign of smoke, a soft earnings season could be the tipping point that starts sending shareholders overboard.
In addition to potentially weakening investment portfolios, the U.S. economy faces the possibility of upwards of trillions of dollar's worth of failed investments. As reported by Sara Sjolin at MarketWatch, analysts at Goldman Sachs are concerned over continued low oil prices. According to Sjolin:
Goldman Sachs found in its Top 400 analysis of the world's largest new oil-and-gas fields, that pre-sanctioned projects will be "uneconomic" at $70 a barrell...In dollar terms, this means that around $2 trillion worth of future investments are at risk...This also includes shale developments, where investments for $930 billion are in jeopardy, according to the report.While I do not have access to the Goldman Sachs report and cannot further breakdown the source of the $2 trillion of future investments (be they world wide or domestic), much of the US production of oil comes from shale fields. If these numbers are substantially attributable to the US, these discontinued and failed investments can be a large hit to the US economy as a whole (which for comparison purposes is approximately $17.6 trillion).
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