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Oil Prices, Rig Count And The Economic Impact
Submitted by Lance Roberts via STA Wealth Management,
A few years ago I spent a good deal of time overseas. When you travel for an extended period, it is always interesting to begin to understand the perception that people in other parts of the world have about where you come from. When I was living and working in Spain, it was a common misconception that since I was from Texas I must own cows and oil wells. (I was also asked several times if we really did ride horses to work and wear cowboy hats. Okay, some people still do.) The point is that perception and reality can be two entirely different things. The current perception is that falling oil prices will be a net positive to the economy. However, could reality actually be quite different?
Since 2010, the Texas economy has boomed due to the surge in oil prices which has led to substantial increases in employment, net worth and corporate profits. People from all over the country have moved to Texas in droves in search of higher wage-paying employment than what could be achieved in many other states. With a substantially lower cost of living, Texas has been a mecca in the desert of economic growth found in many states since the financial crisis.
As I wrote recently in Falling Energy Costs:
"Oil and gas production makeup a hefty chunk of the "mining and manufacturing" component of the employment rolls. Since 2000, when the oil price boom gained traction, Texas has comprised more than 40% of all jobs in the country according to first quarter data from the Dallas Federal Reserve."
This is a very important point as oil prices continue to fall towards the $40/bbl range. As oil prices rise and fall so does the number of rigs being utilized to drill for oil which ultimately also impacts employment. This is shown in the two charts below. The first is oil prices versus rig count, and the second is rig count versus employment in the oil and gas sector of the economy.
Obviously, the drawdown in energy prices is going to start to weigh on the Texas economy rather sharply over the next several months. Several energy companies have already announced layoffs, rig count reductions and budgetary cuts going into 2015. It is still very early in the cycle so it is likely that things will get substantially worse before they get better.
When it comes to investing in energy related companies, it may be too soon to be calling a bottom as well. It is highly likely that rig counts are going to fall rather sharply over the next several months. As shown in the chart below there is a very high correlation between the prices of energy companies (as represented by XOP and XLE) and the number of operating drilling rigs.
As I stated, it is currently a widely held belief that the decline in energy prices is a POSITIVE for the overall economy as it provides consumers with relief at the gas pump allowing them to spend elsewhere in the economy. As I have discussed previously, there is scant evidence that this is indeed the case.
However, instead of rehashing old thoughts, let's take a look at the relationship between oil prices, rig count, and the economy. The chart below compares oil prices and rig count to the annual change in real GDP, retail sales, and total employment.
The historical data suggests that while the economy currently appears to be doing better than its global counterparts, the decline in oil prices is likely to going to begin to provide a bigger than expected drag on the economy.
This should not be surprising. It is currently estimated that each job created in the energy sector, which are some of the highest wage paying jobs in the country, contributes roughly 2.8 jobs elsewhere. One of the prime examples of this has been North Dakota where the fracking industry has led to an employment boom for everything from waiters to exotic dancers as reported by CNN Money:
"Forget Vegas. Strippers are discovering they can make ten times as much dancing in the oil boomtown of Williston, N.D.
Thousands of men have come here seeking high-paying jobs working for the oil companies. And, at the end of the day (or four or five days when they're working on a rig), many of them are looking for some female companionship at one of the town's two strip club's, Whispers or Heartbreakers."
Let's go back to the migratory pattern of employment for moment. The immigration of employment to Texas has been both a boon and a potential curse. In 2014, then Texas Governor Rick Perry quipped:
""If you rent a U-Haul to move your company, it costs twice as much to go from San Francisco to Austin than the other way around, because you can’t find enough trucks to flee the Golden State,"
While the inflows into Texas have elevated home prices, spurred additional economic growth and lifted incomes; the question is what happens now? The potential rise in unemployment in Texas will leave many without options. Many of the states that people fled from are in not much better shape today than they were several years ago. Furthermore, with a large chunk of the 16-54-year-old population currently out of the labor force, the competition for jobs remains incredibly high.
While it is certainly hopeful that the U.S. economy can somehow escape "death by a thousand oil price declines," I suspect that the global deflationary pressures are coming home to roost much more quickly than expected. The recent Markit Services PMI report confirmed the same as they stated:
"The PMI surveys act as good leading indicators of GDP data, and suggest that the pace of US economic growth will have slowed in the fourth quarter. According to the PMIs, fourth quarter growth is looking more like 2.0% rather than the 5.0% annualised rate of expansion enjoyed in the third quarter.
“Job creation has waned alongside the slowdown, with the survey indicating that monthly payroll growth has slipped significantly below the 200,000 mark. Companies have become increasingly reluctant to take on staff due to the cloudier economic outlook, in turn linked to various factors ranging from global geopolitical concerns, worries about higher interest rates and uncertainty about rising staff healthcare costs."
While the vast majority of mainstream economists and analysts currently expect 2015 to be another robust year for the economy and the markets, there is a rising risk to that forecast.
If oil prices, a reflection of global economic demand, remains depressed for a considerable period of time, the negative impacts of loss of employment, reductions in capital expenditures and declines in corporate profitability could outstrip any small economic benefit gained from lower oil prices. As I stated previously, for those of us who have lived in Texas long enough to remember the oil rout in the early 80's, the greatest fear in 2015 is that oil prices remain low.
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In an economic war with Russia and Putin, there will be unintended consequences.
A multi-spectrum war is being waged against Moscow by Washington
Petro-politics have been a major feature of this multi-spectrum war too. Not only have energy prices been a factor in this struggle, but so are financial markets and national currencies. The manipulated decline in the price of energy, which has been driven by the flooding of the global market with oil, is now being augmented by a siege on the value of the Russian ruble. This is part of what appears to be a deliberate two-pronged attack on the Russian Federation that seeks to cut Russia’s revenues through market manipulation via economic sanctions and price drops. It is what you would call a «double whammy». While sanctions have been imposed on the Russian economy by the US and its allies, including Australia, Canada, the European Union, and Japan, offensives on Russia’s main source of revenue — energy — and its national currency have taken place.
http://www.globalresearch.ca/from-energy-war-to-currency-war-americas-at...
So you are the ONE watching CNBS
https://www.youtube.com/watch?v=VI6tBwVjyOY
Now you just plagiarize other comments in the same thread you are spamming your cookbook in?
The simple logic is that if lower oil prices are bad for the economy, then higher prices would be better for the economy.
$200 per barrel >> $30 per barrel.
See how that is utter bullshit?
Not necessarily. It would be perfectly consistant to propose that stable oil prices are beneficial and that it is wild swings to either side that wreak havoc with the oil markets, businesses, and investors.
I can't help but feel there are plenty of people here who would be more than happy with $200 oil even though it would completely crush the world economy.
#talking their book.
"See how that is utter BS?"
For the same reason that the housing bubble was better for the economy, Domestic drilling created lots and lots go jobs. Money was borrowed and spent. The small bounce in the economy was largely driven by a drilling boom. Now comes the poison. Now the hammer is coming down on debt that can't bee paid back. All that easy credit will disappear and so will the US economy,
hh
You 'oil guys' really have to get over yourselves. The 'oil crash = end of the world' paradigm is bullshit.
Now go over into the corner and sulk alone.
The mainstream view is in sharp contrast to the perceptive view in January 2008 that TS was about to HTF. /s/
Best estimate from my research is the oil derivatives start imploding in April 15.
Maybe it will be ODHTF.
Cui bono ?
The BRIICTS.
Short of nuking Saudi, I don't see how this changes.Although Uncle Scam may do exactly that,
ehen he discovers he is in a trap of his own making.
No need for interference, the best bet for a sudden sharp rise in oil prices is that the Saudi King passes away, and there is a full blown succession crisis.
I also remember the massive bull market of the 80s. Nice try, Tyler. Energy will crash, and the rest won't.
!987 was really bullish as I remember.S+L crisis right after.
Did your mother drop you on your head ?
Except that it takes energy to get real shit done. And there is more than one kind of crash. The DOW could go to 1,000,000 in nominal terms, and that wouldn't matter very much if it took $5,000,000 to buy a loaf of bread.
You didn't have the mass of derivatives tied to the price of oil / industry debt back then that you have now.
...and I also remember 13% interest rate mortgages and 15% interest rates on T bonds. Bullish !!
Funny how a year ago all the ZH articles were about how fracking and shale oil was going to dry up in a matter of months do to rapid well production drop-off. All the crazy speculation thrown at the energy sector. How it basically was an illusion, a lie. You would think we'd be cheering the end of this awful period of malinvestment around here. But no, apparently not. Now it's a tragedy for all these 'totally legit' middle class jobs and for the whole US economy.
We should be so fortunate to languish in a world of cheap energy. It's one of the things that drove the US middle class to prominence throughout the 20th centrury. This WILL help most of the people on this board.
You said it better than I could, NoDebt.
I'm so fucking confused. I thought all the articles a year ago were about bitcoin. Clearly I've been here too long.
You're presenting a false dichotomy. Yes, fracking and shale have insanely high drop-off rates that require new wells to keep up with output. Yes, this is based upon Fed-fueled malinvestment, that is definitely NOT a good thing.
Guess what though? As Mises clearly laid out a century ago, there is no escape from the consequences of a credit-fueled crack-up boom, as ALL actions have consequences.
In this case, the consequence is an even further destruction of the middle class. Cheap energy is good as long as it's not due to the malinvestment witnessed over the last X years.
In other words, it's been unnaturally cheap, and now, we're going to pay the price for all of the wasted capital that supported it. Cheap energy today just really isn't that cheap when all things are considered.
This is a catch-22. Cheap prices means that producers cannot afford to produce at current production levels and expensive prices means that consumers cannot afford consume. The volatility is just getting warmed up and over the next decade or less, economies are going to be forced to get a lot more local.
The historical context of low oil prices being beneficial to USA is gone because we are not an industrial centered economy "except for oil and gas" and the downstream benefits today - only effect - is lower costs for consumers - but they need serious income to take advantage and create incremental consumer demand
the major beneficiary is CHINA - they have the factories for the world - all energy driven
so USA loses high paying oilfield, steel, and associated jobs with no measurable upside and blip in consumer demand goes back to china for trinkets and electronics with small margin to amazon and the distribution costs associated with labor
The government should intervene with our tax dollars to keep these companies in business. After all, as American citizens it is our duty to make sure our fellow Americans don't lose their jobs because the price of what they produce is falling.
/sarc
Have you learned nothing from the globalists? Just open up the borders to a never ending flow of slave labor. That will protect the bottom line. Sheesh.... bunch of amatures. Tune in tomorrow where I teach you to BTFD.
I am one of the ones who moved to Texas, I think it would be funny if Austin had a collapse. The rest of Texas will be fine. BTW I hated Austin before I moved here and I picked a location in another County. Fuck Austin. It would be quite ironic because all the lib queer retarded transplants from cali live in Travis county. I may be affected for a time but it would be worth it. Maybe, just maybe they would move home!
Also, I belive the main exodus was done between 2007 - 2014. All the poeple who could afford it already moved here. It's slowing down and from what I hear a lot of people are moving to Utah, Nevada, Idaho (a lot of Texans), Oregon and Washingon State.
Hope so, I live in Htown and its way too fucking congested.good riddance.
The only thing that worries me is everyone is broke as shit, so they may not be able to afford to move back. This would be one welfare system I support, offer money for Californians to move back, but they have to move within 30 days and sign paper work that they can never come back. LOL
Cali outlawed the confederate Flag . So next time I am ask if I want to fly to cali I will ask what's the target list
Also in 2011, they passed a law if you own over 500 rnds of ammo, automatic pelony. That's when I left. Don't worry I am from WI, only passed through the people rebuplic of cali.
How funny. I have an old home movie my folks took at Knott's Berry Farm back in 1963. I'm in it wearing a Kepi with a Confederate flag on it that my Dad bought me from a souvenier stand there.
Ah, good times....
In '63, Knott's Berry Farm was, well, a berry farm (with a few rides and stuff like that). 'Orange County' was named thusly due to the citrus production. Walt Disney built his amusement park out in the middle of the sticks, and people thought he was nuts.
California was actually a nice place to live, back then. Hell, I lived right off of La Cienega Blvd. in Inglewood in 1969, and it wasn't dark in the middle of the day (in fact, white/NORMAL people could walk the streets back when the police weren't 'roided up and the CIA had yet to introduce Crack Cocaine). I moved from California in 1990, though, and never looked back.
I didn't realize that the Moonbeam administration had banned CSA flags, though. Do they also ban the televising of re-runs of 'The Dukes Of Hazzard', or the 'CMT' channel in general?
La Mirada 63
Like every other State U. town, Austin's grip upon the tax purse will ensure it outlasts the remainder of the state without such a scam. The only danger is the student loan bubble popping, and I'm guessing DC will destroy the rest of the economy before letting true price discovery happen in that market.
Very seldom do the inmates seek to return to the asylum....
"As we stated previously, for those who have lived in Texas long enough to remember the oil rout in the early 80's, the greatest fear in 2015 is that oil prices remain low."
I do remember those dark days and I fully expect their return....I pray for those idiots who think the short benefit of paying less at the pump is a blessing.
The author dodges the more important question of 'why is oil down'. Certainly if it is because of 'too much oil' -- the very sudden collapse in the number of active rigs will quickly correct that oversupply problem. Higher oil prices have been called a 'hidden tax' on the American Middle Class -- and I see this as simply too powerful of a lure for the big banks to let go on for very long. Whether it takes some MIddle East saber rattling by Iran or Israel, whether the Nigerian rebels need to blow something up, whether a refinery fire, whether a barge collision on the Mississippi, whether Iraq rebels blowing something up -- I see one or more of these catalysts coming into play by spring which will raise oil prices and help drain the pockets of the American Middle Class. Goldman and JPM are NOT going to let me pump $2 gas into my car this summer -- rather they are going to want me to pump $3 gas into my car so that the derivatives and futures that they are buying NOW will go up by 50% come this summer.
Diesel buyers getting fooked.
Kerosene still $4.65 per Gal. where I live.
It's been that way ever since the 'retail' price of diesel went up over the price of gas (about 35 years back, in case you didn't notice). Diesel is much lower in the cracking process than gasoline (just above bunker oil, in fact; I think about 3 steps), and costs about half as much to make.
The tradeoff is higher durability of the compression-ignition engines (that aren't built out of aluminum and aren't computer-controlled) combined with he FACT that when (not IF, WHEN) the availability of gasoline is curtailed, the MILITARIES use diesel as well (primarily).
You can NOW see the profitability spread, as diesel is about $3.20 a gallon, while gasoline is hovering around $2.00 a gallon. It's STRANGE that diesel maintains the $1.00 or so average price rise that it held when gasoline was $4.00 a gallon, isn't it? IN FACT, when gas was $4.00, diesel was only (ONLY!) about $.80 more. NOW, the spread has gone up to about $1.20.
As I recall from my early education, a pound of diesel will yield about 120,000 BTUs, and a pound of gasoline yields about 86,000 BTUs. Perhaps some number-cruncher somewhere decided to price the fuel in a fixed rate per BTU (instead of a percentage of costs of production). Fucking nerd-packing ASSHOLES...
O/T santelli is going apeshit on LIESman right now.
So you are the ONE watching CNBS!!!
Yeah lol.
I don't think Santelli is ever off topic.
Why is it that it's all the "smartest guys in the room" telling me that low oil prices are bad?
I understand you all clearly know better than I what's good for me. I thank you for that and I'm ready for oil to go back up to $100+ now.
Would you mind also confiscating my 401k for me, please?
its bad because it has happened so abruptly. the rapid decent causes panic, instead of logical adjustments, and allowance for new technologies.
of course, the Fed just loves malinvestment, so.... whatever.
I don't care why or how gas went down. Never look a gift horse in the mouth.
A drop below $60.00 a barrel make the fracking operations unprofitable. The hedge funds that invested in this shit will lose money. The jobs created by this artificial and short-lived fake boost to the economy will evaporate. The hedge-fund insurers will be forced to pay out massively. It will go all they way down, in the 'trickle-down' effect.
The company who bakes your bread will lose their ass because they invested in the hedge-fund, so the price of a loaf of bread will be doubled or trebled to compensate. You drive to the store and pay 2 feds a gallon, and buy a loaf of bread for 6 feds (for example).
You don't care RIGHT NOW, because you haven't thought that far ahead (a month or two). Typical fucking 'herd mentality' at play. You'll be bitching about the rise in other prices, and failing to understand. You'll be paying $1.50 a gallon and 'living the dream' when you get a 'pink slip' because you aren't needed anymore (because your employer lost his ass due to the fact that he invested in the hedge-fund bullshit that funded the fracking operations).
NO BULLSHIT.
So, you're saying it's different this time?
Let one of the dumbest guys tell you low oil prices are good for everyone. If you lose your job, you can drive around a lot more cheaply to look for another one.
Or conversely, without the malinvestment as a consequence of financial repression then maybe those who have had their returns confiscated from them by Fed policy will see some light at the end of that tunnel.
.
STA Wealth Management needs some muppets to go long here.
could it have anything to do with some very large financial institution relocating operations to the DFW area??? Consolidating operations out of NY, OH, FL, and CA?????
1. you cant link to the "dallas Fed" and then have a random gif with no cited numbers in it
2. Who, exactly, is estimating that 1 oilfield job is worth 2.8 other jobs?
i cant even imagine how many other poorly cited "facts" are in here. the sloppiness destroys the point.
"Who, exactly, is estimating that 1 oilfield job is worth 2.8 other jobs?"
Estimates from the mass layoffs at McDonnel Douglas in Long Beach, California, in 1990 (22,000 workers) put the direct effects of these layoffs at approximately 150,000 people. When one 'good-paying' job goes away, the immediate family suffers directly; but the guy cooking hamburgers that this worker eats from loses this business, and the dry-cleaner who cleans his suit loses this business, and the coffee shop that the guy stops in on the way to work loses this business, and the barber shop and the porno store and the cable company and the auto repair shop and the car dealer and the book store and the places his wife spends money at and the Girl Scouts (where his kids buy cookies) and everyone ELSE loses this money that he formerly had to spend. That 'home improvement project' he was planning for; well, forget THAT SHIT.
In the case of McDonnel Douglas, the 'subcontractors' who built the little parts that these workers assembled into bigger parts saw their orders fall, and had to lay off THEIR employees as well. Oilfield job losses and lack of work will cause those that provide drill bits and hardware and steel and oil for the machinery and the machinery itself to do the SAME FUCKING THING.
"Gee, Montgomery, I never thought about it THAT way."
It's all right. You never THOUGHT.
OSO: You have no thoughts besides those in front of your nose. Until you see it first-hand, it's still some 'mental masturbation' excersize for you. Keep up your shit train of thought, and remember: Your messiah Obama and his socialist minions WILL keep you comfortable.
Monty, you're obviously passionate about this but FFS hasn't 99.9% of the US population been scaling back since 2008?
Recall when McDonalds numbers up ticked in 08-09 due to JSP splurging on the family meal there rather than the "sit down" restaurant?
I'm sure you were paying attention when their numbers began dropping again late last year.
Average Joe has scaled back and is scaling back again. Not much room left. He hasn't been paying debts or taking on new credit. Getting damn near a bottom if you ask me. We will not see a Mad Max scenario in our lifetimes GFT. Regardless of how bad some people want.
Those of us who actually are forward thinking and self sufficient have slowly detached from the tendrils that hold most of society together. Inconveniences will continue to come but life goes on my friend.
Well then, we should push the price of oil to $300.00 a barrel. That should do the economy wonders, don't ya think?
the price of diesel fuel was brought up, you can thank the epa, (the environmentalist), for quadrupling the price of diesel fuel from 2000-2014.
epa restricted high sulfur use in diesel fuel, which meant truck manufacturers could only sale trucks that ran on low, or I think now it's ultra-low sulfur diesel, which meant more expensive trucks, (new emission systems), and when the epa called for the lower sulfur diesel, the refineries had to retool, I read it cost refineries 8bil. which yes, you pay for for that, even though govt. denies that daily, they make doing business, then deny that raises prices.
ok, my real reason for commenting, I hope the people who had the guts to pack-up, assuming left the big cities, and go look for work, stick it out. I'd love nothing more than to have 1-2 million Americans IMMIGRATE to the southern border looking for work.
Anyone that invests based on past correlations is one broke person. Oil and currencies sometimes have a positive and sometimes have a negative correlation with equity markets.