With Oil falling last year I posited the possibility that this decline could have some pretty dire consequences. While cheaper gas prices are a boon for consumers, what are the long term consequences of the 50% 7 month collapse in oil prices? Is this another bubble bursting that bears watching and will it lead to a stock market collapse? I think it would be naive not to explore this possibility.
While the trend of the stock market remains up, we have seen some dramatic moves the last three and a half months. Today the Dow Jones Industrial average dropped over 300 points as crude oil plunged to a fresh five plus year low. While I think there is a chance we will see stocks continue to correct I'm still looking for a market that is trading at record highs into the spring.
There are some concerns outside of the collapse in oil prices. We have the Eurozone firmly in focus, with Greece leading the way. If we've learned anything since the stock market lows in March of 2009, its that the Central Banks will do anything and everything to stave off a crisis. Deflation is the villain these days and the playbook for dealing with deflation has been zero or negative rate interest policy and quantitative easing, but will that be enough to combat the effects of the "Oil Bubble"? Is there even such a thing as an oil bubble?
Bubble or not crude oil has endured a massive collapse:
When the housing market collapsed in 2007 and 2008 the price of houses dropped over 50%. Cheaper housing is good news for the consumer right? Not only was cheaper housing not good for the over levereaged consumer, it was even worse for the banks who handled the loans the consumers used to buy those houses.
When oil prices collapsed in 2014 and 2015 by over 50% cheaper oil was good for the consumer right? Everyone seems to be in agreement that cheaper oil is great for the consumer. Are they right? At the moment they are. But when that same consumer is losing his/her job because of cheaper oil/gas prices, the price of gas doesn't matter. You don't care about cheaper gas prices when you don't have the money to fuel your car.
Look at this article from Bloomberg written in 2012:
Drilling for oil and natural gas in shale rock is supporting 1.7 million U.S. jobs this year, including workers outside the energy industry such as waiters and shop clerks, according to researcher IHS Global Insight.
Job tied to unconventional oil and gas production will reach 3.5 million by 2035, according to the report backed by the industry and released today. Because U.S. unemployment is high, many finding jobs related to drilling otherwise would be unemployed, said John Larson, a vice president at IHS and the study’s lead author.
This article from late 2014 when Oil was at $93 a barrel spoke of shutting rigs down when the price dropped below $80. Today Crude dropped under $50 a barrel.... I wonder how many more rigs are getting shut down.
Jobs are being lost as the price of crude drops. Companies are cutting costs, cutting dividends, and if the price doesn't start to rise, they'll be cutting a lot more and perhaps lose the ability to service their debt. That will set off another whole set of dominoes that will affect more than just the energy sector.
Again it is something to ponder as we move into 2015. Is the 50% drop in oil another bubble that will take down stock markets? Or is this just another buyable headwind for stocks, a boon for the consumer, and just another wonderful side affect of a low inflation environment?
Here are some more articles on this topic.
Low Oil Prices - Sign of a Debt Bubble?
Let's Act Before the Oil Bubble Bursts
Who will get caught when the oil debt bubble bursts