Will Oil Prices Drag Down the Economy?
Oil prices dropped by more than 15% this year. And gasoline has broken $3 per gallon in some states.
Good news, right? Not if you like having a job…
The country’s economic recovery is strongly tied to the jobs and revenue created by the shale boom. But now the market is flooded with supply, pushing prices down and affecting producers’ bottom lines.
On top of that, OPEC is out for blood.
Saudi Arabia has made it clear that it’s willing to accept much lower prices in order to damage rivals in the United States.
It’s not clear who will win this game of chicken, but someone’s economy is going to suffer.
How Low Can They Go?
We’ve been warning Wall Street Daily readers about the impending collapse in oil prices.
If you listened, you’ve probably saved a bundle of cash by already getting out of the oil market – especially shale plays, as they’ve been absolutely hammered over the past few months. Some are down by more than 40%.
Shale plays are popping up left and right. More producers means more competition, and more competition means lower prices.
But this is a case of too much expansion too quickly. Prices are dropping to a point that will make it hard for companies to stay profitable.
On top of that, OPEC is hell-bent on running U.S. oil out of business.
Saudi Arabia fired the first salvo last week when it announced that it would price oil lower. Iran followed suit shortly after.
Officials have said Saudi Arabia is prepared to sell oil as low as $80 for two years in order to curb competition from the United States. So it’s certainly in it for the long haul.
All the while, inventories and production are increasing.
OPEC’s production jumped to 31 million barrels per day in September, up from just over 30 million in August. That’s the most output from OPEC in more than two years!
But this is a dangerous game that leaves both the United States and OPEC’s economies vulnerable to a slump.
Sacrificing the Pawns
In the United States, the biggest number of jobs created since the Great Recession has come from the energy patch.
We would definitely not have emerged as quickly as we did were it not for the massive shale oil and gas boom the country just experienced.
The research group IHS estimates that five million jobs directly related to the energy boom will be created by 2025.
Add to this the number of companies in the energy sector that would go out of business overnight, and you’re looking at a major uptick in the unemployment rate.
OPEC members are in danger because their economies rely so heavily on oil.
These countries are often viewed as super low-cost producers that can enjoy the fruits of their bountiful black gold at any price.
While it’s true that they are the lowest-cost producers – some reports have Saudi Arabia producing oil for around $30 per barrel – it’s the selling price of oil that’s important.
Most OPEC members are wholly reliant on the proceeds of oil sales to make ends meet and keep their countries functioning.
Venezuela requires oil prices to be above $121 per barrel. Iran needs oil to be trading at more than $120 per barrel. Saudi Arabia needs to be above $93 per barrel. Countries like Qatar and Kuwait can make do with prices in the $60s.
With the situations on both sides of the Atlantic, many could make the case for a total collapse in oil prices (some might predict $20 per barrel).
But that’s an unlikely scenario.
Prices may correct, but there’s too much riding on the price of oil for the players to allow it to completely collapse.
Who Will Come Out on Top?
The price bottom should occur between $70 and $85 per barrel.
While the charts show significant support at $70, we can count on a few good reasons why the price will never get there.
It’s more likely that prices would drop slowly over the next few years. But before that happens, the U.S. government would step in and loosen export restrictions.
OPEC members stand to be the biggest losers, as their economies – unlike those of industrialized countries – are completely dependent on the very same resource they’re trying to push lower.
Eventually OPEC, despite its proclivity to produce more oil than necessary, would have no choice but to cut back production for the greater good of its membership.
And “the chase” continues,