An Early Christmas Gift – Lower Oil Prices
December 12, 2014

This week West Texas Intermediate (WTI) Crude dropped to $60/barrel, which is a level we haven’t seen since 2009. Why is this such a big deal? Oil prices influence almost every item we use and consume on a daily basis. The food we eat uses specific amounts of oil products to plant, harvest, package, and deliver to your local grocery store. The vehicles we drive are the most obvious use of oil and accounts for roughly 65% of the daily oil consumption (20 million barrels a day) in the U.S. Other items we forget about are those used in our day to day lives such as the keyboard I am typing on, the chair I sit in, the pen I write with, and the computer which processes this information. Each of these items have an input cost associated with oil prices. Since the peak this summer at $100/barrel we have seen a 40% drop. These cost savings will eventually get passed onto the consumer, in one way or another, but most people won’t recognize it. The one place we do notice this is at the gas pump. Unleaded gas is moving closer to $2.00/gal and might actually dip below this amount by the end of the year. For the average family, this equates to a savings of several hundred dollars per month. It reminds me of the “stimulus” enacted in 2009 when everyone received a check for $400. In most cases, those one-time events rarely provide any long term economic benefit. The benefit of lower energy costs will be similar to a monthly stimulus, but is likely to continue well into next year.

For companies in the energy exploration business, it can hurt if prices were not hedged for 2015 or for those that are highly leveraged. In general, most will adapt and reduce their budgets until the picture becomes clearer. Large integrated companies with refining operations, will benefit from lower input prices and most likely see better margins during this period. We have seen this before, and understand the expansion and contraction of budgets usually follows the swings in oil prices.

Yes, if you work for an oil company or provide services to them, it will be a time of reduced spending. Prices will not stay down forever. Once the global economy gets moving again, we will see the demand and price return to a normalized level. For now, the additional capacity brought on by the production in the U.S. has made us the largest producer of oil in the world, thanks to areas of the Bakken, Eagleford and Permian. The timing is just right and reminds me of an early Christmas present for the average consumer. With two-thirds of our economy based on consumer spending, this discount at the pump bodes well for the U.S. economy in the 4th quarter and into 2015.