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Anyone That Believes That Collapsing Oil Prices Are Good For The Economy Is Crazy

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Oil - Public DomainAre much lower oil prices good news for the U.S. economy?  Only if you like collapsing capital expenditures, rising unemployment and a potential financial implosion on Wall Street.  Yes, lower gasoline prices are good news for the middle class.  I certainly would rather pay two dollars for a gallon of gas than four dollars.  But in order to have money to fill up your vehicle you have got to have an income first.  And since the last recession, the energy sector has been the number one creator of good jobs in the U.S. economy by far.  Barack Obama loves to stand up and take credit for the fact that the employment picture in this country has been improving slightly, but without the energy industry boom, unemployment would be through the roof.  And now that the “energy boom” is rapidly becoming an “energy bust”, what will happen to the struggling U.S. economy as we head into 2015?

At the start of this article I mentioned that much lower oil prices would result in “collapsing capital expenditures”.

If you do not know what a “capital expenditure” is, the following is a definition that comes from Investopedia

“Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. This type of outlay is made by companies to maintain or increase the scope of their operations. These expenditures can include everything from repairing a roof to building a brand new factory.”

Needless to say, this kind of spending is very good for an economy.  It builds infrastructure, it creates jobs and it is an investment in the future.

In recent years, energy companies have been pouring massive amounts of money into capital expenditures.  In fact, the energy sector currently accounts for about a third of all capital expenditures in the United States according to Deutsche Bank

US private investment spending is usually ~15% of US GDP or $2.8trn now. This investment consists of $1.6trn spent annually on equipment and software, $700bn on non-residential construction and a bit over $500bn on residential. Equipment and software is 35% technology and communications, 25-30% is industrial equipment for energy, utilities and agriculture, 15% is transportation equipment, with remaining 20-25% related to other industries or intangibles. Non-residential construction is 20% oil and gas producing structures and 30% is energy related in total. We estimate global investment spending is 20% of S&P EPS or 12% from US. The Energy sector is responsible for a third of S&P 500 capex.

These companies make these investments because they believe that there are big profits to be made.

Unfortunately, when the price of oil crashes those investments become unprofitable and capital expenditures start getting slashed almost immediately.

For example, the budget for 2015 at ConocoPhillips has already been reduced by 20 percent

ConocoPhillips is one of the bigger shale players. And its decision to slash its budget for next year by 20% is raising eyebrows. The company said the new target reflects lower spending on major projects as well as “unconventional plays.” Despite the expectation that others will follow, it doesn’t mean U.S. shale oil production is dead. Just don’t expect a surge in spending like in recent years.

And Reuters is reporting that the number of new well permits for the industry as a whole plunged by an astounding 40 percent during the month of November…

Plunging oil prices sparked a drop of almost 40 percent in new well permits issued across the United States in November, in a sudden pause in the growth of the U.S. shale oil and gas boom that started around 2007.

Data provided exclusively to Reuters on Tuesday by industry data firm Drilling Info Inc showed 4,520 new well permits were approved last month, down from 7,227 in October.

If the price of oil stays this low or continues dropping, this is just the beginning.

Meanwhile, the flow of good jobs that this industry has been producing is also likely to start drying up.

According to the Perryman Group, the energy sector currently supports 9.3 million permanent jobs in this country

According to a new study, investments in oil and gas exploration and production generate substantial economic gains, as well as other benefits such as increased energy independence. The Perryman Group estimates that the industry as a whole generates an economic stimulus of almost $1.2 trillion in gross product each year, as well as more than 9.3 million permanent jobs across the nation.

The ripple effects are everywhere. If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

And these are good paying jobs.  They aren’t eight dollar part-time jobs down at your local big box retailer.  These are jobs that comfortably support middle class families.  These are precisely the kinds of jobs that we cannot afford to lose.

In recent years, there has been a noticeable economic difference between areas of the country where energy is being produced and where energy is not being produced.

Since December 2007, a total of 1.36 million jobs have been gained in shale oil states.

Meanwhile, a total of 424,000 jobs have been lost in non-shale oil states.

So what happens now that the shale oil boom is turning into a bust?

That is a very good question.

Even more ominous is what an oil price collapse could mean for our financial system.

The last time the price of oil declined by more than 40 dollars in less than six months, there was a financial meltdown on Wall Street and we experienced the deepest recession that we have seen since the days of the Great Depression.

And now many fear that this collapse in the price of oil could trigger another financial panic.

According to Citigroup, the energy sector now accounts for 17 percent of the high yield bond market.

J.P. Morgan says that it is actually 18 percent.

In any event, the reality of the matter is that the health of these “junk bonds” is absolutely critical to our financial system.  And according to Deutsche Bank, if these bonds start defaulting it could “trigger a broader high-yield market default cycle”

Based on recent stress tests of subprime borrowers in the energy sector in the US produced by Deutsche Bank, should the price of US crude fall by a further 20pc to $60 per barrel, it could result in up to a 30pc default rate among B and CCC rated high-yield US borrowers in the industry. West Texas Intermediate crude is currently trading at multi-year lows of around $75 per barrel, down from $107 per barrel in June.

A shock of that magnitude could be sufficient to trigger a broader high-yield market default cycle, if materialized,” warn Deutsche strategists Oleg Melentyev and Daniel Sorid in their report.

If the price of oil stays at this level or continues to go down, it is inevitable that we will start to see some of these junk bonds go bad.

In fact, one Motley Fool article recently stated that one industry analyst believes that up to 40 percent of all energy junk bonds could eventually go into default…

The junk bonds, or noninvestment-rated bonds, of energy companies are also beginning to see heavy selling as investors start to worry that drillers could one day default on these bonds. Those defaults could get so bad, according to one analyst, that up to 40% of all energy junk bonds go into default over the next few years if oil prices don’t recover.

That would be a total nightmare for Wall Street.

And of course bond defaults would only be part of the equation.  As I wrote about the other day, a crash in junk bonds is almost always followed by a significant stock market correction.

In addition, plunging oil prices could end up absolutely destroying the banks that are holding enormous amounts of energy derivatives.  This is something that I recently covered in this article and this article.

As you read this, there are five “too big to fail” banks that each have more than 40 trillion dollars in exposure to derivatives.  Of course only a small fraction of that total exposure is made up of energy derivatives, but a small fraction of 40 trillion dollars is still a massive amount of money.

These derivatives trades are largely unregulated, and even Forbes admits that they are likely to be at the heart of the coming financial collapse…

No one understands the derivative risk positions of the Too Big To Fail Banks, JP Morgan Chase, Citigroup, Bank of America, Goldman Sachs or Morgan Stanley. There is presently no way to measure the risks involved in the leverage, quantity of collateral, or stability of counter-parties for these major institutions. To me personally they are big black holes capable of potential wrack and ruin. Without access to confidential internal data about these risky derivative positions the regulators cannot react in a timely and measured fashion to block the threat to financial stability, according to a National Bureau of Economic Research study.

So do we have any hope?

Yes, if oil prices start going back up, much of what you just read about can be averted.

Unfortunately, that does not seem likely any time soon.  Even though U.S. energy companies are cutting back on capital expenditures, most of them are still actually projecting an increase in production for 2015.  Here is one example from Bloomberg

Continental, the biggest holder of drilling rights in the Bakken, last month said 2015 output will grow between 23 percent and 29 percent even after shelving plans to allocate more money to exploration.

Higher levels of production will just drive the price of oil even lower.

At this point, Morgan Stanley is saying that the price of oil could plummet as low as $43 a barrel next year.

If that happens, it would be absolutely catastrophic to the most important industry in the United States.

In turn, that would be absolutely catastrophic for the economy as a whole.

So don’t let anyone tell you that much lower oil prices are “good” for the economy.

That is just a bunch of nonsense.

  • FortuneSeek3rz

    What would the perfect price of oil be for blogs such as The Economic Collapse? Surely there is a happy medium somewhere between 120 and 60 dollars a barrel?

    • NewbieJames

      The problem is not a particular price. The problem is the boom/bust cycle orchestrated by the central bank. Suppose interest rates were set by the market. In that sane world, oil companies with strong balance sheets would have developed the shale in a more measured, balanced way. WTI would have been less than $100 but more than $65. Instead you get ZIRP, and everyone plows in to drill, drill, drill. In that case you have zero auditing, zero planning, and zero cost controls. Blow the estimate for a project (LOL–what estimate), just grab some more cash and fix it. We saw the same with the housing boom. When will the world learn and drop the monetarist/keynesian crap.

      • FortuneSeek3rz

        If the prices crashes, the banks risk loan defaults, if the price rises the middle class budgets get squeezed. There is always some problem with the price of gas. If solar were to take off tomorrow, the narrative would become about how many jobs the oil and gas industry will lose instead of how many solar panel developers will gain.

        • IHateGreed

          Its all about what industry will feed the rich and greedy, period. We (middle class) will never have it easy as long as those 2 factors are involved..

        • T.

          Solar will Not take tomorrow or ever in our life time. The name of the game for world energy needs is oil and gas. Period.

  • K

    Just another step in the plan, to collapse America. Also at least in my area, only gasoline is dropping in price. With a smaller cost for transportation, why is nothing else moving. Groceries are still high, and heating oil, has not dropped a single penny. You might almost think the economy in general is rigged.

    • Old timer

      My guess is it takes a while for the other industries to catch up with the gas price drop. Most of what is in stores ect was from higher oil prices.

      • K

        On most things, I would agree. I would normally expect at least a slight change in produce by now. Since most of it should be post drop. I guess we will all see soon enough.

        • Old timer

          Depending on what the fuel was for the machines to plant/harvest some. you have to factor that into to the cost of produce. If prices stay low for crude oil then we may see a drop in cost in a few months plus I would think.

    • NewbieJames

      Most likely the heating oil wholesaler has bought futures to hedge. He’s hurting right now and will drop prices slowly. They’ll work their way down. Also, diesel and home heating oil are more highly regulated by the EPA. My theory is some congressional aide saw the icky black smoke come out of a truck. Eww, icky. Anyhow, diesel used to be much lower than gasoline, basically a byproduct. Now it is considerably more expensive than gasoline due to the enviro regs.

      • hidflect

        Diesel is now more expensive because it is more critical. Trucks, planes, ships, generators. They all outweigh your family car. The price inversion is a sign of peak cheap oil. Prices rise where a commodity is most needed.

    • Greg

      So mike if oil goes back up,you will just look for another topic to keep your blog going?
      Do you really believe the economy will collapse ? C’mon if was going to collapse it already would have. Look you even explained new law yesterday that will cover all the derivative losses that you love to talk about.

      • Alwaystomorrow

        I agree. Constant talk of 1000 jobs lost here and another 1000 jobs lost there but I never heard you mention the hundreds of thousands of jobs created in the oil sector until now.

        • Greg

          good pt about no mention of oil jobs. this is so brutally fixed its a joke. i wish for reset so true capitalism can start over.
          wife just pd $75 co-pay on advair. yeah off topic but the whole system is so out of whack.
          michael you are great writer and pick interesting topics, but everything that you write about as a big problem is just passed over like a bump in the road. the us economy is big enough for the fraudsters to do whatever they want.
          we all make our own choices and i always accept responsibilty but at least i get a $4,700 write off for my silver losses. preppiing is almost emabarrsing at times, when i see people on long island eating out and partying like never before. just rambling.
          question?
          if everyone knows all the govt reports are blatant lies..how do they always get away with it?!

          • Alwaystomorrow

            My approach has always been this long before reading this stuff…have no debt! You can never go wrong being the owner of your house, car, and everything else. After that then consider using your expendable income on things like prepping.

          • Jay Wilbanks

            theres no such thing as a ‘reset’

      • K

        Well, I am not Michael. But according to your theory. An old rotten barn, so bad it is leaning to one side. Will not collapse, because it already should have. Yeah, that is not how it works.

        • Douglas M. Green

          True, but I have come to find that the gubment and fed will get more crazy in their actions to keep that barn from falling. I have no doubt it will fall eventually, but anyone predicting its fall must consider the superhuman efforts that will be employed to prop it up and the likelihood of their success in kicking the can.

          • nekksys

            Kicking the can down the road = delaying the inevitable.

            An economy fueled by debt can only go on so long before the time lag between money creation / destruction becomes so short the whole thing crumbles. (BTW, currency != money…) As Michael has pointed out several times, stock valuations have become completely disconnected from reality. There is no way a company that does not produce a tangible product and has never turned a profit (Twitter) can have any real monetary value. Why? Because value is commodity based. Even an idea can become a commodity, and thus have real value, if it can be reduced to a physically controllable item. (A Twitter feed on a publicly accessible forum isn’t exactly a physically controllable item…)

          • Concerned Citizen

            “Kicking the can down the road = delaying the inevitable”. This has been said countless times since 2008! IMO we are living in the new normal. There most likely will NOT be a major collapse resulting in Anarchy and a general reset of society like so many want. Each year that passes (soon to be another one) is proof that my theory is correct.

          • Hot Rain

            We are the only Superpower on earth. Our dollar is the only reserve currency. The largest corporations are American. Our technology is advanced and sought after. Our military reigns supreme.
            And somehow you think this can all go belly-up overnight? It would take a perfect storm. Obviously you cannot even see the dark clouds forming..

          • kouoon

            WHY DONT YOU BRUSH UP ON HISTORY AND READ ABOUT THE 1929 BUST. SAME THING LINING UP NOW. TOO MUCH INVESTED IN THE WRONG PLACES IN THE STOCK MARKET. IT ONLY TAKES ONE SMALL BAD TURN TO GET IT STARTED

          • Mark G

            I thought a superpower was any country that has nuclear weapons.

          • Just curious

            What about entertainment…no commodity there, but the rich entertainers would argue that there is monetary value to it.

          • nekksys

            Can music or video be reduced to a physically tangible, controllable medium? Yes, they can.

          • Hot Rain

            “Superhuman efforts” to make like we are not failing. I could have said that myself. You must be a disciple of David Weidemer (Aftershock) There is nothing I agree with more than his thesis on the “Bubble Economy”.
            This article points out many ‘bubbles’ that will be contributing factors to economic meltdown.
            You get a Gold Star…

          • Jay Wilbanks

            yeah with a 17tril dollar economy…we are ‘failing’. i call this the ‘chicken little syndrom’ and you guys have it in bulk.

      • harleyrider1903

        It hasn’t collapsed because they keep on printing money and mouse click dollars. Their biggest fear is they stop printing money!

      • big lie

        no kidding none of this stuff is true. Look at the dow know up

        • kouoon

          KEEP BELIEVING THAT. THE MARKET IS FUELED BY 401K INVESTMENTS.WHEN THE LAYOFF IN THE OIL INDUSTRY STARTS TO HAPPEN LIKE IT DID IN 1982 EVERY SECTOR OF THE ECOMONY WILL BE EFFECTED. THE SAUDI ARE TRYING TO BUST THE US OIL INDUSTRY. MANY SMALLER DRILLERS WILL GO UNDER AND MANY SUPPORT INDUSTRIES WILL SUFFER.

      • JFG

        The central planners can keep this economy running longer than expected. Just because economic collapse is inevitable doesn’t mean it is imminent. We know the US will collapse, but economists cannot predict the WHEN factor.

      • Diane Livingston

        It’s coming and I hope you have invested in some gold and are ready to move investments when it happens.

    • Priszilla

      Who uses still heating oil?

      • Tom

        The Northeast part of the US

        • Orange Jean

          Yup, that would include my oldest brother and my son, both of whom live in NH. I know oil prices are a big concern, every winter… especially since you had to fill the whole tank in advance, in stead of “pay as you go”.

          All of the housing I lived in when I was in New England was oil heat, with the exception of the house I lived in until I was 8 (we had a coal furnace). I don’t know too many who use anything else; a few people I know use wood stoves (in Maine). Electric heat was always way too expensive in that region. Might be a few who have natural gas, but still oil is the main one.

    • ej

      Time, K. When prices stay low (we’re talking Months), and people start complaining, that is when other prices will start moving.
      Because, when does anything drop in price instantly? However, if there’s an increase, we see it in a blink of an eye!!!!

    • Arturo

      You are just the type of person this “blog” undoubtedly loves.

    • TheLittleHolyInfantJesusBlesse

      I noticed the same thing, too. In my area, there are old and new gasoline stations everywhere and I saw that gas prices for regular gas were dropping on average from 2.99(highest amount) to 1.09(lowest amount) while prices for everything else hasn’t changed.

    • Arturo

      You realize this isn’t a new site, right? It’s not intended to educate or inform. It’s here to present one view and do anything to make you believe it.

  • Erik Bergum

    The oil prices should go back up in January though I do not know if that will happen!!!!

  • Bill

    Just the first stage of the “Great Collapse”, defiantly an oxymoron.

  • Kim

    we have been preparing for this for a long time. I’m not sorry to see these fracking operations collapse. I’m not sorry to see irresponsible banks on the bad end of the deal take massive losses. I am very sorry to see small towns and cities that relied on the economics of the fracking boom. i

  • demand has collapsed

    oil lobby already talkin bailout,what they gonna do at $10-15 a barrel! Saudis obsessed with wiping shale of the map,plus collapse in demand for virtually everything.hopefully they’ll be a fresh war to drive prices through the roof,can never get enough killin

    • T.

      The fresh war will be on a street near you and me. These oil prices in the $40 to $60 range will kill the shale oil jobs; The junk bond market; and The Derivatives correlated to the junk bonds and This will kill our Economy next year, 2015. Then the real pain and suffering begins for millions more of Americans. The “Great Unraveling” will begin next year. Get Ready.

      • alan

        That’s what I am kind of thinking, around 40 for very long someone getting their oil field nuked.

      • Douglas M. Green

        Martin Armstrong says “2015.75”

        • Tim

          What do you mean by 2015.75?

          • T.

            .75 equals September/October 2015.

          • Tim

            Thanks, T.

        • Phoenix!!!

          Shemitah says September 13, 2015, I believe. Everyone is pointing to another crash in 2015….follows the seven year cycle….we are preparing…

      • HotRain

        For once T, we agree. Kudos on the post.
        2015 will usher in major food/gas price hikes. Much of this from ‘lag time’ catch up from uber money printing pushing up interest rates.

        • T.

          If/When interests rates Rise – There will be a nuclear explosion in the Derivative market heard all round the World.

    • Wizard of Aus

      Demand has not collapsed – it is still there. OPEC is oversupplying the market & that is why the price is falling. Excess supply constant demand = price falls

      • Mike Smithy

        The corollary pursuant to the law of supply and demand doesn’t seem to apply in the precious metals (PM) market. Demand for physical gold and silver has never been higher and yet the price seems to be pegged at $1200 and $16 respectively. If the banksters can rig the PM market why can’t they rig the petroleum market?

        • alan

          Doesn’t apply to oil either. If that’s the case it should have dropped years ago.

    • Mike Smithy

      I can’t help but wonder what the primary motivation is for the western central banksters. Is the petroleum beat-down orchestrated to punish Russia or is the motivation to destroy domestic shale producers or is it the black swan they created to deflect their culpability pursuant to the inevitable collapse of the economy?

      • Prices are a consequence not a cause. Nobody ‘lowered’ prices to raise hell, the hell has been already raised and the economy is bleeding => insufficient credit to bid petroleum.

        Shale producers have been mostly underwater from the beginning: the tide has simply gone out.

        One reason for low prices = central bank easing that has added to debt burden of customers while reducing their purchasing power. Even w/ ‘strong’ dollar too few have enough of them to afford to bid for fuel.

    • Saudia has nothing to do with falling prices, they are as dependent upon $110+ crude as the frackers. Without oil sales Saudia cannot pay off its millions of non-working Saudi citizens and keep them fat-n-happy.

      Falling prices = broke customers. Soon to come = broke oil producers. That will put folks’ knickers in a twist.

      • Kapricorn4

        Saudia has huge investments in the US stock market, so that if they lack liquidity from crude oil sales, they will offload their stock. Is this why the market may have topped out?

  • Imaplaneiac

    I filled my gas tank, yesterday; at $2.39 a gallon ( Regular ).

    • FortuneSeek3rz

      These low gas prices, if they persist, will spur new job growth in other areas outside of drilling and exploration. It will be good for the vast majority of the economy as a whole if it lasts long enough.

      • NewbieJames

        Yes. The oil discoveries were real, so you get a real benefit. Lower diesel means lower shipping and lower farm expenses. All good. Only problem we’re probably in the bust of the boom/bust cycle caused by the Fed. Once the bankruptcies hit, and production is taken off the market, prices go up again. This kind of whipsaw effect is bad. However prices will probably be low for a year, so enjoy.

      • grumpyhillbilly

        Obama care and taxes will negate the oil price drop. There will likely be no new growth.

      • T.

        Where? McDonalds. They just lost Big on sales 4 months running. Some stores are barely making it. The world economy is in depression. This is scaring the banksters. They are trying to hold off the world wide Collapse till September 2015. The sudden collapse in the oil price (down 40% in 4 months) is death to many Financial instruments (Bonds, Derivatives, Stocks) and they’re all inter connected. One can take down another ie. domino effect. I can wish that your assumption is correct but the financial facts say otherwise.

  • Midwest Values

    Low oil prices are great. It’s fun to watch, Maduro, Putin and the Ayatollah sweat while I pay less then $3 gallon. I sense an Arab Spring is coming to other parts of the world

    • alan

      If you see a flash duck and cover!

  • Hot Rain

    It’s just a ploy by the Saudis to make shale oil too expensive to produce and regain command of the market. The low prices will not last.

  • VigilanteCaregiver

    Okay boys and girls; here’s what we’re doing.

    A good sized methane digestor with an air compressor attached and a breeding set of rabbits (3 does / 1 buck / usually 18-24 bunnies and pre-fryer’s rotating) to feed the digestor. These digestors are not good enough to supply a steady supply of gas off a single family’s waste alone – the rabbits provide plenty daily. Takes about two weeks per rabbit pellet to be completely worked. Products are clean methane gas, industrial liquor, water, and refined yet sanitized fertilizer.

    I’m not running a modern car off the methane, though. Built a simple horseless carriage replica and it’s road legal (much easier to build than it looks).

    Methane, compressed with the air compressor into spare tanks, works for home heating, cooking, and power generation also.

    I’m not going down with a suicidal nation like some welfare punk.

    • alan

      I seem to remember the Red Chinese using large inflatable bags on top of city buses running on methane about 30 years ago.

      • VigilanteCaregiver

        It’s just a back up system. Got a better idea I’d love to hear it.

        No really; if you do have a better idea I really do want to hear it. This system’s the best I could do.

  • Joe Kleinkamp

    Call me crazy then. Spending $30 / week less on gas is fine with me and fine with the businesses I will now spend that money at. Is there anything, ANYTHING that isn’t bad news on this blog?

    • Tom

      I don’t know if I would call it bad news as much as “cause and effect”

    • T.

      You need to go to MSM if you are looking for good news on the economic outlook for the nation. It is controlled in order to make you think? “everything is fine”. This blog seeks to give the whole truth and what the ramifications are for a rapid 40% decline in oil prices (the most needed/used commodity on the planet). The objective is to present the Whole Truth – No matter how Ugly the picture may be as a result of all the inadvertent ramifications of that TRUTH. Hope that clears things up some for you about This Blog.

      • Joe Kleinkamp

        Yeah, agreed. I know all about the liberal and corporate bias of the mainstream media. I’ve been reading and commenting positively on this blog for a few years. But when you speak about the “Whole Truth” with regard to low oil prices you need to include the many positives of the oil boom, We’ve all been glad to see our country moving toward energy independence throughout this decade. We’ve all complained about raising our national debt by importing oil from countries that hate us. We’ve all complained about high gasoline and heating oil prices. The truth is that lower oil prices caused by making use of our own God given resources helps all Americans. If you are a manufacturer or a company in the transportation business $62 / bbl oil is a bonanza. If you are a previously middle class ex-employee you will be glad to see a few extra items in the grocery cart thanks to your energy savings. Much of what I read here I agree with but articles like this are a bit of a stretch. Once in a while I disagree. If I didn’t think for myself I guess I’d be one of those sheeple we like to criticize.

        • T.

          I enjoy lower prices at the pump as much as you and transportation companies (ex Trucker myself), manufacturers, etc. and all the rest. But what we have to consider is the big financial picture as given by Michael in this article and the ramifications this has elsewhere. If you want to read an excellent article that gives a thorough explanation of what these lower oil prices mean – please go to an article by David Stockman (OM&B) under Reagan and google the title: Fed ignoring shale bubble in plain sight. This will put a whole lot of meat on the bones of what Michael is trying to get across in this article. God bless.

    • Scottsman

      Well that is a rhetorical question I assume. I mean the title of the blog is not Economic Expansion or Happy Times are here again… jeez

      • Joe Kleinkamp

        Thanks for clearing that up. Jeez is there a bee up your kilt Scotty?

        • Scottsman

          Yea – feels good too

  • Wise Up

    Pray for the best and prepare for the worst.

  • Priszilla

    Oil is just one part of energy. There is also sun, wind, waves, geothermal, methan from sewage and landfills, coal. There is daylight, solar thermal, solar cooling. There is storage. Storage in reservoirs, in batteries, in tanks, in flywheels, underground.
    Oil is also raw material. For food, for medicine, cleaning materials, clothing, construction materials.
    With cheaper oil the transport services will thrive.
    The crash of 2008 can be blamed on high oil prices.

    • Preparequickly

      The crash of 2015 will be blamed on low oil prices. Whatever they can use in there favor.

      • Priszilla

        Whoever THEY are, whatrever THEY do.
        Ask yourself what you can do for yourself to exploit low prices now to protect against high prices later.
        I had the house of my parents insulated and the heating system upgraded. Now they use the equivalent of 3 liter heating oil per year and squaremeter for heating and hot water.

  • alan

    Demand dropped off a long time ago maybe three years ago. The prices only dropped in the last six months, which also coincides with the shenanigan with the Russian’s.

    Shale oil is a scam, the amount has been revised lower and lower to very little now. Also we get most of our oil locally, Canada and Mexico. So the Saudi’s shouldn’t care really what we do. I think this is all about starting $hit with the Russian’s.

    Enjoy it while you can before it goes crazy in the other direction.

    • Tom

      The Saudis are beginning to move toward the Chinese and Russians. If our energy sector takes a big hit while the Saudis cut more deals with China and Russia, expect to see higher prices and shortages here. In addition, everyone is moving away from the USD. This has the makings of a really bad situation

  • Tom

    I wonder what the value of junk bonds held by public and private pension systems is across the US? What kind of a “hit” would they be taking should this break down?

  • Jackie Milton

    I personally hope it drops to 10 bucks a barrel and the economy crashes along with it. That’s the only way this government will get a handle on entitlements. I say force the welfare queens to plant a garden and raise a pig to eat.

    • Just Sayin

      I say force the welfare queens out of the country altogether!

    • Hot Rain

      Be careful what you wish for..

      • Jackie Milton

        I considered the alternatives before i made the wish. lol

    • The welfare queen is at the end of your driveway. Since it doesn’t earn, it must be paid for with debt x 1 billion queens worldwide = trillion$ in unpayable obligations.

      What is underway right now: ‘Conservation by Other Means’.

      • Kapricorn4

        There is already a huge overproduction of automobiles word wide. There are huge car parks full of unsold vehicles, but what amazes me is how well the price of used cars holds up.

    • Katie Sutton

      I say force the entitled assholes to look beyond their own narrow view and see the world right in front of them.

  • Newgirl

    I’m an economic grasshopper (so no flames, please) but in your all’s expertise, why would this be bad for the economy if millions more people than jobs lost would have extra money to spend from cheaper gas and thus bolster the economy? Just curious.

  • Nathan Laurenson

    george soros is also propping up argentine shale, so this is also a factor

  • euroclydon

    In this particular case, I disagree with the author on one point. I don’t think that such a person would be “crazy” as much as “misinformed”.

    The former implies a mental derangement, while the latter implies a lack of information. E.g., how many people truly understand what money devaluation is, or what “inflation” really means? After all, there’s football and television to watch.

    A person might look back on their youth and recall when gasoline was
    $1.08 per gallon in the early 80’s and think that things are finally
    “normalizing”.

    How many people understand what the “petro dollar” is, and how lower prices hurt Russia’s economy, thereby heightening tensions?

    When the oil companies make billions in profits a year, a person might think that they are finally not getting gouged at the pump. Who cares about those @*#^% oil companies?

    No, I don’t think that they are “crazy”, they are just so distracted by their day to day life, and the “bread and circuses”, that they simply don’t know any better.

  • DJohn1

    The key here is not anyone factor but all of them.
    For instance, I would suggest that discretionary income might go up by about $10 a week because it is not going out to feed the oil industry’s monopoly.
    I would suggest a high of $4 a gallon just a year ago. Right now a station was selling it for $2.50 per gallon. That amounts to a $1.50 per gallon and somewhere between 10-14 gallons of gasoline per week, that is a substantial amount of money saved per week per household. Many have two vehicles by necessity. So that could easily amount to a $20 savings. That money feeds other parts of the economy.
    That High of $4 is arbitrary and guess work on my part.
    What I am saying is one factor is going to drive others. Translated to plain english is people have a little more in their pocket to spend. That will drive a flywheel response and cause retail to go up in profits at a time when they desperately need those profits to survive.
    I suggest the derivatives will be postponed until after the first of the year. I am obviously not a economist.
    I just know what happens with average everyday people, not high finance at the banks.
    The other factor is definitely retail sales. If they go down the tubes every retail store out there goes with it.
    So, my opinion is that anything that returns discretionary income of the average person out there will postpone the inevitable crash that is in the works.
    Economists look at the big picture. They mistakenly overlook the factor of the average person out there.
    The biggest mistake of this administration has been overlooking the effect of all the health care changes on the amount of money available to the average person to spend.
    This compounds into a factor that will cause a depression and it has all ready started.
    The Congress has been eating into that discretionary income for 50 years. Then they get upset because they have caused the economy to go wrong.
    The other factor has always been negotiating raises in a currency that buys less and less. That went away in 1990. Almost 11% of the population had Unions. That 11% drove raises throughout the entire economy. But if the raises amount to 2.5% and the inflation is actually at 4% then people lose ground and cannot substain their lifestyles.
    The result is a competiton out there for retail sales that is unreal. Because the discretionary income factor comes back to haunt everyone with national debt of the average household.
    So I respectfully disagree with what is happening. I think the stock market is totally out of touch with the reality I just spelled out.

  • DeadManFromIndia

    demand is collapsing, not just oil, other commodities are getting hammered too , like coal, iron ore etc

    • Hot Rain@aol.com

      Street level scrap prices are crap. For many, they depend on this income.

  • sherlock32555

    It’s good for my purse and sorry for all those that lost their jobs. When it comes to paying crazy prices for oil or looking out for me ,I”ll stand by me all the time.

  • mar1950

    Michael, What is causing the price drop? I have heard at least two theories. 1)Over supply and weak demand due to weak economies. 2)John Kerry making a deal with the saudis to pump all they can and under sell the market for the purpose of a) aiding incumbents in the recent election and b) hurting export revenue for countries like Russia and Iran. What do you think? A combination of both and others?

  • jakartaman

    Micheal, How do you find so many things to write about is such ecruciating detail? Do you have a staff? or is it all you?
    I am not trying to blow smoke up any orifice but you continually amaze me.
    A lot of it goes over my head which is not too unusual but I am appreciative of your work – Thanks and have a good Holiday season while I think of it.

  • harleyrider1903

    Good lord Ive never heard such B.S. in my life.
    Everything is made thru petroleum products in our lives from gasoline to plastics.
    Its cheaper cost makes everything else cheaper to produce and opens up more jobs as the cost of the raw material falls with it.
    The thing that will be destroyed is the already bankrupt Green movement of stupid solar panels and electric cars as the only one buying them in any quantity has been the Governments.
    All of them failed massive multi billion dollar taxpayer financed Trojan horses!
    Cheap gas means more jobs not less……………

    • Drud

      I see, so all Central Bankers everywhere are terrified of deflation (lower prices) and yet, the narrative is that falling oil prices (which drive virtually all other consumer prices) is not just a good thing, but a universally great thing with no unwanted consequences. These people lie with every breath (to themselves as much as to everyone else) and no wonder, there are so many people out there willing tt not only eat there BS with a spoon, but parrot it back vehemently to anyone and everyone who will listen.

  • Preparequickly

    I think the drop in oil price has more to do with politics and keeping a democratic president in 2016. The only other reason they would let it drop so far is to cut off ISIS income so the democrats can say they defeated ISIS before the next election.

  • Bruce

    Don’t worry! These lower prices will NOT stay. Another purposful deception. In no time watch a price rally erase those breaks for the masses in just weeks.

    • harleyrider1903

      Global demand fell due to the decrease in manufacturing worldwide. Then on private land and fracking produced so much more oil for the world market it created a glut…………
      It will take year after Obama is gone and all theEPA regs get reversed for manufacturing in America and other industrialized nations to be able to get back to business as usual.

  • Scottsman

    I think the larger point might be about deflation with Oil just the beginning. Deflating Asset prices and credit contraction is not good for the economy – at least from what I have heard.

  • Mondobeyondo

    A major problem, I feel, is that so many people only look at the short term view.

    They see oil prices falling as a good thing. “Lower gas prices!” they say. They fail to see the long term implications of this – or of anything else, for that matter. We, collectively as a nation, have the attention span of a gnat. Maybe that of a butterfly, but that’s pushing it.

    • Tom Eberlin

      It shouldn’t have been $100.00 a barrel to begin with! It’s a correction in the price not a bottoming out. OPEC artificially set the price to make more money when it wasn’t necessary. Screw their cartel and any idiot who thinks oil should be controlled by the Saudi’s.

  • True Grit

    If I could charge $50 for a hamburger, I would soon be able to afford billions in capital expenditures to open thousands of hamburger stands and Pay $50,000 per year to all my employees. Would you give me the same support?
    Oil was $3.00 per barrel not that long ago.
    We need a re-set.
    Manufacturing jobs could be had in EVERY state. The energy sector or any sector for that matter shouldn’t be the savior of an economy there needs to be a ballance in all sectors

  • Keith Vencel

    Lower gas prices are bad for the economy?? Thats nuts. You fail to realize why gas prices have gone down in the first place.The U.s. gas industry is producing. And americas main source of gas, the saudis, see that and are threatened by it. So, they lower the prices of gas for us to keep us going to them. Its common sense. The u.s. gas industries havent lost anything by this. The U.s. will eventually reach energy independence. Thus, lowering gas prices even more! Also, nearly every product one buys from a store is shipped through 18 wheeler trucks. Trucks run on gas. Lower gas prices, means business owners can lower the prices of their goods and service to attract more customers to them. This is common sense! LOWER GAS PRICES ARE GOOD FOR THE ECONOMY!!! Im suprised a smart guy like Mike Maloney put this article on his website.

    • Mathews11

      Dude get a grip… you really think stores are going to lower their prices because they get it for cheaper after you been paying 1.75 for a soda for 4 years now… your going to keep paying that… and the article is stating how many jobs are going to be lost without the oilfield… and the US is going to pay more unemployment and welfare out putting us more in debt….

      • Tom Eberlin

        Wrong. Someone will smarten up and sell that soda for a 1.00 just like we are selling the barrel of oil for less than the $100.00 that OPEC wants. It’s called supply and demand. You can’t charge $1.75 for something that someone is willing to sell for a $1.00 and still make a good profit.

      • Keith Vencel

        Yes, businesses want to lower their prices. Have you checked the stock prices of the Dollar Tree and Dollar General? They are higher than Walmart’s stock prices. Businesses want to provide their service at the lowest prices they can, because if they don’t, they know another business will offer it at a lower price, and put them out of business. And the businesses that keep the prices of the services artificially high, the market will put them out of business.

  • Blade_Runner_1776

    18 TRILLIONS in national debt (must add the 1 trillion Boehner just approved) and our “economy” is going to collapse because gas prices are going down?. I sure will not lose any sleep on this one!!

  • David Hammond

    So lower gas prices are bad for the economy….higher gas prices are bad for the economy…this isn’t about the economy crashing…this is about bankrupting Russia….not our economy crashing.

  • @The Perryman Group sez:

    ” … the industry as a whole
    generates an economic stimulus of almost $1.2 trillion in gross product
    each year, as well as more than 9.3 million permanent jobs across the
    nation … ”

    There are economic ‘problems’ when petroleum costs exceed 5% of GDP (James Hamilton) particularly when prices increase in a rush. US GDP last year = $17 tn so Perryman is overstating.

    The entire system is irretrievably broken: the big man borrows the little man repays, the big man holds assets while the little man is stuck with the debt. Little man cannot hold anything any more = he’s busted so prices are plunging.

    There is no real way to increase purchasing power of little man; to do so would gain nothing more than a tiny bit of time, before supplies are depleted and purchasing power collapses again. Purchasing power = available capital (non-renewable resources). As capital is depleted so is purchasing power.

  • AMERI

    Mike,

    Thanks for pointing out all the negatives. Now need to evaluate all the positives and weigh them to see which one wins.

    During the Clinton years, low oil prices resulted in a prolonged boom and even a budget surplus.

    I think that more $s in the hands of 200 Million drivers and economic stimulation easily trumps even 1 Million high paying jobs in Shale and Oil.

    To help stabilize oil prices we should support shale oil with a 10% rebate and offset it with a small tax at the pump for all sources of oil. This way oil can be maintained at the $70-80 level which would be best for everyone. Only the most expensive shale and deep water oil would be postponed till demand increases.

  • Notme

    Yea, The Corporate owned media was trumpeting how wonderful the lower oil prices are and how much money you are saving and how great that is. Its hard to believe the sheeple actually believe it.

  • Justin Craft

    Why is it that we can’t just stop all imports of oil, that way the oil companies here in the US have plenty of demand for the oil that they are producing? Seems to me that would be the most beneficial thing for our oil workers and our economy.

  • 1Bernhard2

    The U.S. administrations are basically siding with Iran against Saudi Arabia and the Emirates both in Syria and Irak. This policy has created a Shiite power house reaching from Iran through Irak, Syria to the Hezbollah of Lebanon, and the Hamas of Palestine and Israel.
    This was NOT the deal when the Saudis accepted Nixon’s Petrodollar. So the Saudis are striking back with IS and low oil prices…against US interests.
    Israel has warned the US administrations for many years NOT to go this way…but the USA was more intelligent…or was it?
    Not only Saudi Arabia and Israel have had enough of their US ally…but Turkey, too. Not to forget: A NATO partner!
    So, with this background it would be unlikely for oil prices to bounce back…but I’ll bet: Obama and Co. are already thinking hard about their Middle East policies…and once they will realize that their policies against Saudi Arabia will LOWER oil prices they will scramble hard for a change…and at the end Obama will go down as the Alternative Energy President …SORRY…as the OI & Gas Energy President.

  • SK

    It’s still higher than pre-Katrina, and things were good then……

  • Tommy Hyer

    This is hogwash. I know a gentleman who is in the oil and natural gas business. He says, oil should never be above $50 dollars a barrel and we’re not running out of it anytime soon. Believes we should R&D alternative energy, but wisely. Not like Barry has and cost the taxpayer’s billions of dollars in losses. We do need to undercut the Saudi’s and OPEC. Sell to our allies and cause a resurgence in our own economy. We need to get the RINO’s out of the Republican party and make sure the Democrats never get in power again. With good folks who put country first in office, we might stand a chance in getting rid of the debt, a stronger military, undo or wipe out the “entitlement” crowd. The country needs to return to it’s roots. It won’t be easy, but it’s not undoable. Need Term Limits, Flat Tax, close our borders, overhaul immigration, deport all illegals. If Mexico and other countries scream, too bad. Oh, no visas for Muslims, period. No immigration of Muslim’s unless they truly aided our armed forces and marked for death in their own country. For example, the Doctor in Pakistan that helped us kill Bin Laden. This man should have been rewarded. Now, he sit in prison in Pakistan. I could go on and on here, but ya catch my drift.

  • Trickle-down economics

    I would recommend “Economic In One Lesson”, Henry Hazlitt, to the author of this article.

  • john morris

    So what you are telling me is the Oil Companies CEO’s multi million dollars are legitimate capital expenditures.

  • Dan

    This is the arab nations trying to run the American oil industry out of business, eventually when they realize how much money they are losing they will raise the cost and the US will again produce oil, unfortunately jobs will be lost, my brother in law is a geologist in north dakota and has been guaranteed another 2 years but they dont know after that

  • j

    It’s funny that everyone’s concerned about big oil company’s but you did here nothing when small business owner had to shut down. Layoffs are part of oil field work I know I used to work oil field so that’s nothing new. It an article to get Americans to panic so they can jack up the price and everyone’s fine. Ex. If price per barrel drops shouldn’t the price you pay per gallon so the profits should stay the same. This is the media blowing everything way out of proportion.

  • C.m. Head

    18 trillion in debit ,70 to 80 trillion in programs not funded, letting the liberals spend hundreds of billions to insure less than two million. Remember almost 6 million had theirs cancel by the dems. We need jobs and less spending. Too chiefs not enough Indians.

  • jv

    I don’t where this person lives, that wrote this, but $8 an hour isn’t Middle-class! Which with consumers spending more money (disposal income), because they have extra money due to the fact they aren’t spending it at the pump. All the extra traffic at retailers movies, zoo, restaurants, malls, schools, etc. that requires more ppl to help the customers which means more jobs.

  • History repeating/ read a book

    So the big oil companies will create an artificial shortage. Wealthy people will buy oil and gas stock because it historically rebounds. The price will go back up, while the rich get richer, and the prices stabilize somewhere closer to their actual cost. During the summer travel season fuel prices will be up again to $4-6 dollars a gallon. The cost of fuel has been inflated for several years with the oil and gas industry being one of few areas to thrive in an otherwise dismal economy. The fact that none of the transportation dependant expenses have yet to be affected is the only thing that concerns me at this point. Groceries, transportation, shipping etc. should have reduced slightly along with the gas prices. If they don’t adjust now, but follow the rise back up, our economy will worsen. With the wealthy accounting for less than 10%, and the middle class and lower class benefiting from the lower gas prices, this is just a redistribution of wealth during the holiday season. The gas prices lowering frees up funds that would be delegated to heating and transportation to be spent on other sectors. Sectors that have been long suffering. What’s with all the gloom and doom? Grab some popcorn and watch the show.

  • What about capital expenditures for the other 2/3 of the economy that haven’t had any since the price of fuel was so high?

  • Jay

    I don’t buy anything these “economists” say. They convinced businesses to stop pensions, enforced 401ks (which just gives them more money to gamble with), and they caused the “great recession” lent money for mortgages to people who couldn’t pay etc.

    I’ll take my 2 dollar gas and don’t really care at all if a business’s stock drops a few points. Get your money out of the markets and focus on hard assets people!

  • Mark

    You must make hundreds of thousands of dollars a year and work in the oil business. And youare afraid of not making as much. The low prices are good in a million ways. People can afford to do more pay employees more or afford to hire more. Other prices will start to follow such as food and beverages. Because the price of transportation will drop. I do not see any problems with thin decrease in fuel….

  • Dave

    let it fall to $5 per barrel. no one will ever convince me that $1/gal gas is bad for me.

  • goldman

    These new oil prices will be a good thing when the pipelines are in full flow. One of your reasons for high oil prices is the cost of storage. Outside of the U.S. I might add. Oh and a bit more of our money for the shipping across the seas. So, yeah cheaper prices are good for us. More money domestically and an opportunity to focus on other things close to home. Not a loss for the people, but a potential shift in the economy for once.

  • Tom Eberlin

    Lower oil prices are going to destroy our economy? Really. You mean spending an inflated an illegal price fix on $100 a barrel of oil is good for us. Really? OPEC controls the amount of oil therefore illegaly setting the price is in American’s best interest? Really?

  • How about now?

    So? These memes I keep seeing being spread around about ‘Oilfield trash spending Oilfield cash’ aren’t all they are cracked up to be? And, ‘Oilfield workers be like… And they said, “You can go to college and earn $80,000 a year. Hahaha!”. Or, “(picture a cheap base model truck) “25 years old and just finished college” (now, picture a huge dually 4×4 with a racing trailer on back) 19 years old and is a roughneck”.
    Seems like college wasn’t such a bad idea after all?

  • brad

    K do you even know why heating oil prices are still high? I do!!

  • Arturo

    This “blog” is devoted to “economic collapse.” It’s here neither to present different points of view nor any story contradicting it’s reason for existing. Therefore, forgive me if I don’t think of it as either a reliable or objective source of information.

  • me

    The economy is not a zero sum game as this article assumes. You really shouldn’t write about economics and finance when you have only a basic understanding of basic principles. Where is John Nash when you need him?!?!

  • me

    And structural unemployment is good for the economy, which is the type of unemployment created here.

  • Jim

    BS swamp gas and mirrors. The economy collapsed when gas was $5 a gallon too…!…;( The other side is that companies who are saving because of cheap energy will increase capital expenditures. Just part of the lies and balancing act of economics.

  • Chris

    Just because there may fewer jobs drilling for oil does not mean fewer jobs in the economy as a whole. People are paying $15-$20 less ever time their fill there car up which can be saved or spent else where it might mean another night at restaurant creating jobs there. Just because one industry suffers does not drain the economy.

  • joe

    Let me guess who wrote this article. Could it be someone invested in big oil?

  • josh

    this website was registered in 2010 warning the world about economic collapse for five years must be profitable. it’s based on fear and earns a large amount of money in ad revenue. right or wrong about the facts, the website owners are profiting on the fear of an economic collapse. good for them! what an awesome small business

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