Having predicted oil prices below $80 in 2014 at the beginning of the year, Saxobank's Steen Jakobsen has a leg or two to stand on when he warns of a "massive correction" in energy stocks andthe drop in prices will rapidly become a headwind for the US economy, adding that "it will subtract 0.5% from GDP, bare minimum." He further notes that due to the strategic importance of the oil industry to America, he suspects the government will attempt (a likely highly unpopular) bailout of the Shale sector. However, as Raul Ilargi Meijer notes, there is a problem for any bailout (aside from public angst), in that bailing out US oil also means bailing out Russian, Libyan, Venezuelan oil...And that would be hard to defend in today’s American political climate, helping Putin and Maduro get back on their feet.
As CNBC notes [3],
An economist who correctly predicted the fall in oil price this year has told CNBC that the U.S. government could look to bail out its energy sector in 2015 as the commodity’s low price starts hitting the country’s economy. “The U.S. energy sector is clearly important,” Steen Jakobsen, the chief economist at Danish investment bank Saxo Bank, told CNBC Wednesday. “They are paramount to the long-term strategic issue that the U.S. will be self-dependent on oil.”
[..]
Jakobsen believes the lower [US energy] could soon become a headwind despite gas becoming cheaper at the pump for U.S. citizens. “It will subtract 0.5% from GDP, bare minimum,” he said. “There’s a precedent here, back in the 80s we also had an oil crisis and that led to bank recoveries.”
He added that oil companies are in for a “massive correction,” similar to the downtrend seen in mining stocks, explaining that exploration was getting “hugely expensive” with energy majors having little free cash flow available. The S&P 500 index has clocked gains of around 11% so far this year but the energy sector within the benchmark is currently down nearly 12%.
One of Jakobsen’s “outrageous” predictions this time last year was for the commodity to drop below $80 per barrel which was achieved in November with oil now trading at around $65. BP sounded the alarm on Wednesday morning by saying that it is implementing a cost-cutting program due to the tumbling prices. Any potential bailout for the sector, or even the banks that lend to them, would prove vastly unpopular in the U.S.
As The Automatic Earth's Raul Ilargi Meijer explains, [4] a bailout remains unlikely...
I don’t think public anger would be the major issue, and I also don’t think the industry is not “systemically important enough” (that seems a bit ignorant even for a ‘senior economist’, the entire edifice runs on oil).
I think the problem, the reason why America cannot bail out its oil industry, at least not overtly, lies elsewhere. Bailing out the US housing industry is one – expensive – thing. Bailing out Wall Street banks is another – closely related, and infinitely more expensive – , but still close. The latter involved bailing out foreign banks, but they’re still primary dealers, or in other words, part of the ‘family’.
Oil is a whole different piece of cake. The Fed or Treasury could try and lower exploration costs, or something in that vein, but in the end the only measure that would be really effective is raising revenue, and that can only be accomplished with higher prices. And since oil prices are set globally. that in turn means that bailing out US oil also means bailing out Russian, Libyan, Venezuelan oil. And that would be hard to defend in today’s American political climate, helping Putin and Maduro get back on their feet.
It’s of course a ‘curious conundrum’, to find that by helping your own you also help your ‘enemy’. But it is, from where I’m sitting, a very real issue when it comes to oil. On top of that, there’s of course the fact that the US shale oil industry is already falling to leveraged bits, and has never been a viable industry, just a land speculation Ponzi. And how or why could the US bail out that kind of scheme out, and at the same time, don’t let’s forget, save the whole financial world from the fall-out of what’s happening to oil? What to do when that plunge starts to infect stocks and bonds, which seems an inevitable next step?
I am of course ready to stand corrected, but I simply don’t see what Steen Jakobsen suggests. Oil is too shattered an industry within the US, and also, though in a different way, globally, to be bailed out and saved by the Fed’s bell.
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