Boler Business : Why people should be concerned about cheap oil

January 28th, 2016




The drop of oil prices below $30 per barrel seems great for consumers, allowing most to fill their car’s tank for $2 per gallon.


Some consumers believe this decrease in prices should help boost the U.S. economy, with people saving more on gas and spending more money elsewhere.


Currently, cheap oil is causing mayhem in the global stock market, with the stock market experiencing its worst start to a year ever.


There are several reasons why consumers should be concerned about cheap oil prices.


The first reason is that  oil companies are dying. In the last decade, the U.S. energy boom was fueled by expensive drilling technology that was designed for higher oil prices and paid for with numerous amounts of debt.


Since the oil is currently cheap, those loans are now much harder to pay off.


Bloomberg reported that last year alone, 81 oil and oilfield services companies filed for bankruptcy.


Many more are expected to succumb to financial trouble in the coming months if the prices of oil do not start rising.


Another reason is that big banks are bracing for losses. It’s never a good sign when the country’s financial lifelines are under stress.


Large U.S. banks such as JPMorgan Chase and Wells Fargo, that help bankroll the energy boom are already setting aside billions to cover potential loan losses in the oil industry currently and in the coming months, reported Bloomberg.


High yield bonds in investing portfolios will not be looking good, either. Standard & Poor’s warned that half of all energy junk bonds are at risk of failing to meet specific legal obligations. In addition, in 2015, the energy industry slashed 130,000 jobs and are continuing to cut more employees.


Cheap oil could signal trouble in the global economy. When economies are booming, they consume lots of oil and vice versa.


The drop in energy prices suggests the global economy is slowing down more than already feared.


A severe global slowdown would be very bad news for large U.S. companies, especially those who serve customers abroad.


Emerging markets are getting crushed. The oil crash raises the risk of a full-blown crisis in the emerging market world.


Many economies like Brazil, Venezuela, Colombia and Russia are powered by energy exports, however they are all experience turmoil as well.


Bloomberg reported that Brazil’s longest recession since the 1930s is getting worse and Russia’s currency just plunged to an all-time low. The U.S. has deep trade relations with many of these countries, and that will undoubtedly take a blow and cause unwanted tension.


More trouble in the Middle East. The decline in oil prices adds a new element of instability to the Middle East.


Tensions are on the rise between OPEC leaders, Saudi Arabia and Iran, which can’t help the already unstable region.


The idea that cheap oil is a positive for the U.S. pivots on the consumers spending the money they’re saving at the pump.


It remains a bit of a mystery whether that’s actually happening at a significant level. On the contrary, Bloomberg reported that the U.S. retail sales actually fell slightly in December despite the fact that gas prices continued to fall at the end of last year.