December 22 2014

A Look at Falling Gas Prices

By: Phil Gallagher

The following is an analysis of gas prices written by BNEWS anchor Phil Gallagher: 

 

The headlines in the past several months have been dominated by continued conflict, global health concerns and political upheaval brought on by the midterm elections.  From a jobs and investment perspective, all of these were trumped by the most significant economic event, the collapse of oil prices.

 

In July of this year West Texas Intermediate crude stood at $105 per barrel. At this writing crude has hit a 5 year low of $54.81, a price not seen since the brief decline during the financial crisis. Some analysts have oil stabilizing at $55 or even lower.

 

At OPEC’s most recent meeting a production cut was rejected. One theory is that the Saudi Arabians hope that lower prices may mean that American production in certain areas may be curtailed as a result of lower prices making many shale wells unprofitable. This is unlikely to have the desired effect since production is energy intensive itself and as costs drop so too will the break-even price for each well.

 

Declining oil prices to this level has enormous effect across the entire global economic spectrum. Every aspect of industry expense and consumer spending will benefit by reduced transportation costs, manufacturing costs, raw materials, heating, cooling, fertilizer and any other area in which petroleum or its derivatives play a role.

 

The benefit to the consumer is being felt immediately by virtue of an increase in disposable income resulting from a reduction in expenses paid on a weekly basis, (i.e. gasoline and home heating oil). If this trend continues, we are likely to see one of the best holiday spending seasons in recent memory since consumer spending represents approximately 70% of United States GDP.

 

The overall benefit to the equity markets is not likely to begin to be realized until the fourth quarter earnings reporting season in January. Even if top line growth remains flat, bottom line growth must benefit from such a reduction in expense lines. The continuing trend into 2015 will likely also impact the GDP of all the oil dependent countries very positively.

 

Unlike 2010, these price levels or even lower may not be transitory. American energy production is up well over 50% over the past 3 years and is still trending upward. Additionally, the technology that has resulted in these enormous gains has not as of yet spread throughout the world.

At this point it is only pure speculation but this development in energy prices may do more for reviving the global economy than all of the previous monetary policy gyrations combined.

 

The United States consumes 19 million barrels of oil per day.  Since July the price of oil has dropped over 50 dollars. That means that over  900 million dollars per day is being shifted from energy purchases directly into the corporate or consumers pocket.

 

Time will tell what impact that will have on the average American.

 

 
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