a blog about investing

Articles

Read A Few Dollars More articles

30 Minutes

Watch Bill Schmick’s TV series

Latest Posts

The Elephant in the room

 

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…

So far, so good

 

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…

OPEC’s oil ploy

OPEC’s oil ploy

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.

 

 

 

30 Minutes

All Posts

What’s not to like?

 

This has to be the most-hated stock market rally in history. No one trusts Wall Street or the stock market and just about everyone is looking for an excuse to sell. There isn’t a day that goes by without some lionized Wall Street sage predicting the top of the market. That’s why it will continue to go up. read more…

Europe is Recovering

It was not that long ago that the world questioned whether the European Union and its currency would survive. Portugal, Greece, Spain and even Italy appeared to be hovering on the brink of economic disaster.  Europe was a basket case but today that assessment may be changing. read more…

Congressional Farm Bill is a disgrace

There were times in the past when farmers needed the government’s protection. There may even be a limited need for it today, despite the good times many in agriculture have enjoyed in recent years. However, nothing can justify the travesty that congress has offered the taxpayer in its new five year plan for agriculture. read more…

Political Posturing Ahead

 

The markets have spent most of this year focusing on concrete things like the economy, jobs, the Fed’s stimulus program and corporate earnings. However, we are entering that time of year when our dysfunctional political parties may once again roil the markets in an attempt to justify their miserable existence. read more…

Food Stamps and the Farm Bill

 

The decision by congress to pass a version of the new farm bill which excludes the food stamp program caused a fair amount of concern throughout America last week. Unless a compromise is reached with the Senate by September, it will mean that a lot of people, especially children, are going to go hungry in the months ahead.  read more…

Nothing is Simple

 

The biggest risk to the markets this week was Fed Chairman Ben Bernanke’s testimony before congress. Despite worries that he would say something that would send the markets into a tail spin, he did nothing of the sort. When it comes to the Fed, Wall Street may be its own worst enemy, and here’s why. read more…

Do you believe?

It may well be the most-hated stock market rally in recent history. Every time we hit a new high, as we did this week, investors brace for the next pull back. When the declines do occur however, they are shallow and soon recover. What is that telling you? read more…

Follow A Few Dollars More

About Bill

Bill Schmick was born in a blue-collar neighborhood of Philadelphia, just a few blocks north of “Rocky Balboa” territory where most of his Catholic schoolmates grew up to be either cops or criminals. He narrowly escaped both professions by volunteering to fight in Vietnam as a U.S. Marine... Read More

@afewdollarsmore

Archives

Post Categories