a blog about investing
The U.S. Senate rejected passage of the Keystone Pipeline by one vote this week. The controversial energy plan will be back on the agenda, however, in January. For most of us, separating fact from fiction as both sides alter the facts is difficult at best, but here are some things we do know. read more…
Stocks have had a wonderful run since mid-October’s swoon. The S&P 500 Index is now up over 10% from its bottom. As we approach another record high, expect some backing and filling before moving higher. I wish I could say the same about the price of oil. read more…
In Beijing this week the annual Asia-Pacific Economic Cooperation summit is winding down. As representatives from its 21 member nations return home, one thing is certain. China has become America’s main rival for influence in that region. read more…
The Financial Verse
What a week it was! The U.S. central bank marked the end of its quantitative easing, while promising to keep interest rates low. On the other side of the world, the Japanese central bank did the opposite. Their Fed increased the amount of stimulus it will add to the economy from $600 billion to over $730 billion per year. read more…
Tim Cook, the CEO of Apple, announced to the world that he was gay in an essay published in Bloomberg BusinessWeek. While many believe Cook’s statement will shock and awe the nation, chances are it won’t. Being part of the LGBT community is not only popular today, but has also become a lucrative niche market for America business. read more…
The IRS has given us all a New Year’s gift. As of January 1, the tax-deferred contributions on a variety of employee-sponsored, retirement savings plans have been increased, but not for IRAs. read more…
If investors needed proof that the market’s bottom is in, this week provided it. It was the best week of the year in stock market gains and it looks like we have more on the way. read more…
Mid-term elections are less than two weeks away. Issues, for the most part, have fallen bye the wayside as pure politics runs amuck. No wonder voter turnout is traditionally so poor in this midterm madness. read more…
This week’s behavior in the stock market went according to plan. We broke through several technical supports, reached a fairly critical level, and then bounced back. However, October isn’t over and the probability that we experience more downside remains high. Here’s my take on the week ahead. read more…
Over the last four months Americans have received an early Christmas present. The price of oil has dropped precipitously, benefiting both corporations as well as the consumer. But that could be a two-edged sword for this nation.
Brent crude, the global oil benchmark in the futures market, has declined 23% since its June price of $115/bbl. Today it is trading below $83/bbl. providing an enormous windfall in cost savings for all of us. The retail price of gasoline has dropped 15% during the same time period to a national average of $3.17/gallon. Every one-cent decline in gas prices equals about a $1 billion drop in energy spending, according to economists. So we have all just received what amounts to a tax cut that has gone directly into our pockets.
That’s the good news. The bad news is that many of the same economists believe the reason prices have fallen so quickly is the deteriorating state of the global economy. Slower growth equals less demand for oil, all things being equal. As such we find ourselves with an oversupply of oil.
Now usually, OPEC, which controls the lion’s share of oil production worldwide, would begin to throttle down the amount of oil produced per day. There would be meetings and all the disparate members of this energy cartel would decide what cut backs are necessary in order to prop up energy prices. This time around no such agreement is contemplated.
Instead, Saudi Arabia, the energy colossus, has been quietly telling the oil market that they would be quite comfortable with even lower prices for an extended period of time. Behind the scenes, they have said that $80/bbl. for a year or two would be just fine with them even though that level of pricing would hurt all OPEC members, and some more than others. Venezuela, for example, is in such bad shape that oil at that level would probably force the country into bankruptcy.
So what, you might ask, is the reason for this change in strategy? OPEC recognizes that a new competitor is emerging in the form of United States energy independence. Readers may be surprised to learn that the U.S. has emerged as the number one oil producer in the world, even as it maintains the same spot in energy consumption. We can thank new technology, such as oil and gas fracking, for the turnabout in our energy prospects.
OPEC competitors would like to slow the rate of production here at home, thereby reducing our competitive edge. The best way to do that is by lowering prices. As prices drop certain sources of energy such as fracking and tar sands become less economical in comparison. Industry experts figure that a drop to $75/bbl. in oil would begin to curtail drillers and producers from developing additional fracking wells. The fracking industry has become much more cost sensitive since the early days of 2003. There has been so much capital sunk into the cost of expanding this output that any price change in oil impacts the bottom line much faster.
Investors are well-aware of that risk which explains why many energy stocks have dropped 25-30% over the last month. By keeping prices low for a year or two, OPEC could effectively gut much of the growth in energy production here at home. I suspect that is their game plan going forward.
There are other negative implications if OPEC succeeds in their plan. The U.S. oil and gas sector has added over 400,000 jobs since 2003. Some estimate that another 1-2 million jobs have been created in construction, manufacturing and transportation to support our drive for energy independence. As a result, although the cost savings in energy consumption might contribute a 0.03% gain to GDP growth, the hit to Americas as a result of a decline in the energy sector could be far greater.
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