The Imploding Energy Sector Is Responsible For A Third Of S&P 500 Capex

Tyler Durden's picture

We have previously discussed the implications that tumbling crude oil prices will have not only on some of the most levered companies with exposure to Brent prices, namely the vast majority of the US energy space with outstanding junk bonds which, as we explained before, should WTI drop to $60, it would "Trigger A Broader HY Market Default Cycle" (based on a Deutsche Bank analysis) leading to pain across the entire credit market (and in the process impairing the stock-buyback machinery which companies aggressively use to artificially boost their stock price), as well as on oil-exporting nations, whose economies are assured to grind to a halt leading to broad social unrest or worse, and lastly, on global asset liquidity, which is set to contract even more now that for the first time in over a decade, the net flow of Petrodollars will be an outflow (as explained in How The Petrodollar Quietly Died, And Nobody Noticed).

And while much has been said about the "benefits" the US economy is poised to reap as a result of the plunge in gas prices, which has been compared to a major tax cut (whatever happened to the core Keynesian tenet that "deflation" is the worst thing that can possibly happen) on the US consumer, almost nothing has been said about the adverse impact on US GDP as a result of tumbling fixed investment spending and CapEx.

The reason, clearly, is that the collapse in new investment will more than offset the boost from incremental household spending.

Here are the facts, per 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. 35% of S&P EPS from investment and commodity spend, 15-20% US



In short, while nobody knows just how many tens of billions in US economic "growth", i.e., GDP, will be eliminated now that energy companies are not only not investing in growth spending or even maintenance, being forced to shut down unprofitable drilling operations and entering spending hibernation territory, the guaranteed outcome is that US GDP is set to slide as the CapEx cliff resulting from Brent prices dropping below the $75/bbl red line under which shale is broadly no longer profitable will offset any GDP benefit unleashed from the "supposed" increase in consumer spending (supposed because according to the latest NRF numbers, Thanksgiving spending was not only well below last year (with the average consumer spending $380.95 over Thanksgiving compared to $407.02 a year ago) but below even our worst case forecasts. So just where are all those external benefits to US retailers as a result of crashing gas prices?

Rhetorical questions aside, the real question is just how much will said GDP slide ultimately be? Sadly, this too will be one question the BEA will never answer, as instead the upcoming GDP plunge will be blamed once again on inclement weather as opposed to actually analyzing what is truly happening as America's transformation to an oil-producing (and maybe exporting) powerhouse, is so rudely interrupted.

The only good news: the resulting surge in America's trade deficit as the US is forced to import more crude in the coming months, will provide just the catalyst for the Fed to return to the game and resume monetizing the US budget deficit, which is poised to commence rising once again.

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FieldingMellish's picture

Yay! Schiff was right.

kaiserhoff's picture

while much has been said about the "benefits" the US economy is poised to reap as a result of the plunge in gas prices, which has been compared to a major tax cut.

Nothing at all has been said around here about those benefits.

Cheap oil and cheaper women.  Back to the sixties.  Praise the Lard.

MalteseFalcon's picture

Cheap oil is absolutely a boon to the US real economy.

Lets face it, no recovery without someone's ox getting gored.

Now we know whose ox.

The oil industry has been a scam for decades.  Time to take one for the team.

Squid-puppets a-go-go's picture

well, fabulous news. All that cash that will no longer go into research and development can go into perfectly sustainable stock buybax!

Wahooo's picture

I'd rather have the financial industry gored. Bad guys never lose.

Lux Fiat's picture

The one thing you can always count on is the occassional curve ball from seemingly out of nowhere.  Saw mention on Martin Armstrong's blog of a German company that has supposedly come up with a way to synthesize petroleum products from water and carbon dioxide.  If it actually works, can be scaled and done relatively cheaply, could be a game changer.  According to the article, not cheap, but could be a stepping stone to approaches that are competitive on down the road.



max2205's picture

Yet spy sticks to ATHs

Yen Cross's picture

  I noticed early Asia gapped the ponzi $usd higher. Get ready for a substancial retrace very soon. Those $usd longs are going to want to cover some of their hedges, and take some profits with the massive slide in the energy, and retail coming in soft.

 I'm looking at the weekly usd/jpy chart and the { 3 week RSI is 96.0537} lmfao.

FieldingMellish's picture

They want it at 100 and then peg it there... forever...

Yen Cross's picture

 What a wasteland these markets have become. The ALGO's are just scapegoats for C/B manipulations.

Racer's picture

is this about funnymentals, uh, what are they?

Yen Cross's picture

 This is about being intelligent enough to differentiate between manipulations and fundamentals, so that you can make rational decisions.

 Fixed it for you...

Omen IV's picture

The entire steel business in PA / Ohio / Indiana / TX -  for Services, and equipment, O.C.T.G. - tubulars-  is being suppported by drilling - it is collapsing - we are going to a mini 86' - when Houston was awash in inventory and everyone went BK - see thru buildings as far as the eye can .....see!

Fall of 84' to June of 86' ($9.62 per Bbl) Rigs stacked, workers off the air, Companies finished, Bond holders fucked, USA is done

but the best of all Obama is fucked



RafterManFMJ's picture

Yup, we're on reduced turns, 12-15 per week, just had a one-week shutdown, rumors of layoffs.

Orders are cratering.

Carbon steel is down, specialty is way down; I believe a few mills will be shut, but am unsure if ours will be...much to much capacity and a few mills will be idled, there is no doubt.

Well, off to those Cyber Monday deals...

Stoploss's picture

Barry and his party are fucked.


kaiserhoff's picture

Let's hope they take the Lame Stream media along for the ride;)

WTFUD's picture

Last man standing pull the plug, please!

Bangalore Torpedo's picture
Bangalore Torpedo (not verified) Nov 30, 2014 6:16 PM

Not to worry people, this is nothing that a few more TBTF bail ins and fresh round of QE4 can't "fix." The central planners will be going all in...again.

kchrisc's picture

Also a third of the civil-strife that will propel the neo-cons back into power with a ReadyReserve vengeance, and evangelical Christian ideology.

Like storm clouds on the horizon. Is your "storm" cellar ready?

An American, not US subject.

cart00ner's picture

The SHTF is getting closer... The biggest Aussie miners have told their workers to take mandatory leave for 3 months after x-mass, first time ever. "But everything is OK"

Yen Cross's picture

 Look at where the T-10's closed Friday

 US 10Y Yield    {2.173}    2.234    2.225    2.166    -0.061    {-2.74%}    28/11

 Look at this usdx weekly chart. First of all, does that look like price discovery or desperation to you>

 Secondly look at the volume graph below. Who's buying usdx, if volume was MUCH lower last week?

FieldingMellish's picture

RSI and MACD on the USDX daily are divergent. RSI on the weekly as well. This is a rare event.

Wait What's picture

"Sadly, this too will be one question the BEA will never answer, as instead the upcoming GDP plunge will be blamed once again on inclement weather as opposed to actually analyzing what is truly happening as America's transformation"

This is the same idiocy that obfuscated last winter's contraction with screams of 'polar vortex' instead of pointing to 3% 10yrTSYs. Raise your hand if you were one of the few who made that distinction. only excuses can keep this fraying narrative from completely coming uraveled. tick, tock, tick, tock, mutherfuckers.

directaction's picture

Kurt Cobb explains clearly why low oil prices could be just the thing to crush the US economy. 

Lavoisier's picture

Houston, we have a problem.

I wonder what they will pull from their hats to counter this. I'm almost believing the Fed has infinite bullets, let's see what happens after this crash.

Yen Cross's picture

 WTF is up with that 120 pip gap in eur/usd? Did Draghi have some secret meetings at the Reinstag over the weekend?

 Oh wait, it's probably the SNB squaring all it's "gold vote" front running.

king leon's picture

The US had big plans to supply Asia with L N G. but it ain't now going to happen due to the high cost of fracking.. Now Putin will clean up in Asia.

king leon's picture

The US had big plans to supply Asia with L N G. but it ain't now going to happen due to the high cost of fracking.. Now Putin will clean up in Asia.

q99x2's picture

Go Putin. Bankrupt the NWO bastards.

new game's picture

stack out time. boom to bust...

cheap shit a coming our way...

batton down NOW!

chill out and relaax.

nothing you or i can do.

ha, ...

AdvancingTime's picture

When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar.  The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. 

When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion. A great deal of the shadow banking world overlaps and falls into the grey world of derivatives.  The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system. The article below delves deeper into the problems caused by falling oil prices.

gdpetti's picture

Reminds me of this article today:…/39544/0/38/38/Y/M.html

"There has only been one other time in history when the price of oil has crashed by more than 40 dollars in less than 6 months.  The last time this happened was during the second half of 2008, and the beginning of that oil price crash preceded the great financial collapse that happened later that year by several months.  Well, now it is happening again, but this time the stakes are even higher.  When the price of oil falls dramatically, that is a sign that economic activity is slowing down.  It can also have a tremendously destabilizing affect on financial markets.  As you will read about below, energy companies now account for approximately 20 percent of the junk bond market.  And a junk bond implosion is usually a signal that a major stock market crash is on the way.  So if you are looking for a “canary in the coal mine”, keep your eye on the performance of energy junk bonds.  If they begin to collapse, that is a sign that all hell is about to break loose on Wall Street."