Cheap Gasoline Isn’t as Good at it Sounds

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NYIT commuters have good reason to rejoice this year’s low price of gasoline. Compared to 2014’s highs, today commuters are saving nearly 50% at the pump each time they fill up their tanks.

Dave Colletti, a NYIT graphic design major and commuter finds some financial breathing room. “Every time you fill up your tank, you’re saving a lot of money and in the end of the year that adds up,” said Colletti.

Eighty-six percent of Americans commute to work or school, and now cheap gas gives their wallets some much-needed bulk. This additional discretionary income should encourage consumer spending, heat up our economy and increase GDP (gross domestic product) growth. But with world markets in turmoil linked to cheap gas and signals of a global slowdown, your financial bliss might not be good for America.

Crude oil is selling at less than $30 a barrel (West Texas Intermediate), China’s GDP growth is declining for the first time in over a decade, and emerging markets like Brazil and Russia are in crisis. “What’s it to me?” you may ask. Well, because in an ever more globalized world, when the world economy is doing bad, it affects domestics markets.

Here is the problem. A strange occurrence is taking place. The price of oil is linked to the stock market, an anomaly that is causing upheavals in world markets. The more oil drops, the stock market drops. If oil goes up, stocks go up. Many consumer goods are made of petroleum, but experts can’t seem to fully explain the phenomenon because cheaper oil should mean cheaper input prices to create a product, which translates to higher profits and growth.

The stock market is a leading economic indicator for the health of an economy. A company’s high and growing stock price usually means it’s profitable. Publicly traded companies sell equity (stocks) and corporate bonds (debt) in the stock market to gain funding to invest in operations and production. But with oil dragging down these stock prices without specifically changing the fundamentals of that company means lost investments. China’s economic slowdown has been a cause attributed to Apple’s poor stock performance from the beginning of the year, just as they voiced their expansion of iPhones to the Chinese market.

“Nothing is as simple as it might seem with economics,” said Bill Feingold, co-founder and managing principal of Hillside Advisors LLC. “Everyone always worries about oil and gas costing too much – turns out it’s also a problem when it costs too little, especially how it messes up the world economy and we end up feeling that back here.”

This oil glut doesn’t mean consumption of, or demand for oil went down. Statistics show that supply went up last year in spite of a higher demand and now the world economy is drowning in oil. This is because when oil was trading above $110 dollars a barrel, it was profitable for oil giants like Shell, Aramco, and ExxonMobil, and even fracking (hydraulic fracturing) pioneers in shale oil to expand production even with expensive methods.

In come the first victims. Fracking companies took out billions of dollars in bank loans and sold their debt (corporate bonds) in the stock market to invest in and expand shale-oil production and infrastructure. Now with oil crashing and struggling to see a floor price, according to Bloomberg Businessweek it’s expected that 5 to 10 percent of shale-oil companies will either go into bankruptcy or see restructuring. Even multinational ExxonMobil, which is involved in many different oil production methods including offshore drilling and fracking, is under the microscope for a credit rating downgrade.

The victims of fracking companies: banks. Banking giants like Citigroup, Wells Fargo and JP Morgan Chase are exposed to the risk of the insolvency of oil production companies drowning in debt. This resulted in US bank equities dropping 12% since the start of 2016 and more at regional banks. Despite multinational banks’ low exposure to shale-oil companies, it may sway their future lending practices, making them reluctant to lend money to other enterprises, affecting business in America. The global slowdown overall will also impact this sector’s performance because lower oil consumption in China and other emerging markets means less production and less consumption, and outstanding loans to pay. American regional banks are in bigger trouble, as their exposure to the oil and gas industry loans ranges from 5 to 20 percent, and their share prices have fallen 20 percent from their highs.

Growing debt and less consumption means cuts for companies. Thousands of jobs in all sectors involving oil production worldwide have already been slashed, and workers in the fracking fields of America should be seriously concerned. According to US News, ExxonMobil has 20 percent fewer workers than five years ago and will have more cuts, BP is slashing 7,000 jobs worldwide by the end of 2017, and Chevron Corp. is cutting 4,000 jobs in addition to last year’s 3,200. Some oil giants are even considering stopping dividend payments to investors to save money, and US-based ConocoPhillips and Italian oil giant Eni have already started the trend. And if a bank goes under, there go those jobs as well.

“I actually didn’t know people were losing their jobs,” said Shawn Nicotri, a communications major and commuter after learning of the repercussions triggered by cheap oil. “I definitely care because I would hate to be in the same situation they are in. I didn’t know so I would like to look more into that now knowing people are losing their jobs.”

All this oil that isn’t being bought needs to be stored at a price. The contagion is spreading to shipping companies, railroads, pipelines and other transportation sectors. Less oil being moved means less business for truckers and shippers and one reason why the Dow Jones Transportation Average fell more than 20% from its peak. Worldwide, the global slowdown forces companies to reduce production, cut jobs, and idle ships.

The word “recession” is being thrown around lately by financial experts, Bloomberg Businessweek and CNBC, among other sources. Some believe globalization will force us to “import” a recession. But don’t worry about one yet because consumer goods, wages, and the labor market have been very positive and are also indicators of economic health, albeit a lagging one.

According to CNBC, disposable income in America increased by 3.6% last year and household savings rates is at 5.2% of disposable income, the highest level since 2012.  “U.S. consumer spending was unchanged in December, but a jump in savings to a three-year high suggested consumption could rebound in the months ahead,” writes Reuters for CNBC. This means the savings might be spent soon, giving consumer spending a boost. And consumption is what drives GDP growth.

Dave Colletti is thinking of investing the money saved from cheap gas in the purchase of a computer graphic programming software in the end of the year. “That money than I’m saving it’s definitely going to a multitude of things whether its food or textbooks or equipment,” said Colletti.

Pete Athanasopoulos, a junior in communication arts doesn’t believe lost jobs in oil will have a major effect on the economy. “It’s sad,” said Athanasopoulos. “But there is always a job out there for someone, there is always someone willing to pay another person for services.”

NYIT economics professor Diamando Afxentiou, Ph.D. says there will always be jobs. She states that despite jobs lost to technological advancement, jobs in maintaining the new machines and in other sectors and are expanding. In fact, the American economy today is still the strongest economy in the world and it is indeed growing. Even with an anemic growth of 2% per year, at least it is not contracting like the Chinese, Russian, and Brazilian economies. The issue here is, where will the jobs be?

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1 Comment

One Response to “Cheap Gasoline Isn’t as Good at it Sounds”

  1. Dave Steiner on May 3rd, 2016 12:49 AM

    Aren’t we really complaining about a good thing ultimately? I think a few obvious factors caused the surge in oil 1. Fracking….US becomes less dependent on Saudi Arabia 2. The Iran deal…don’t think oil wasn’t behind this in the wink wink handshake part of this…Iranian reserves on the open market drive prices way down 3. We control more of Iraq oil than anyone will ever say…and we ultimately can use this for global pricing advantage to help control supply and demand 4. Electrical car deployment and development is exploding…tesla, the volt and autonomous initiatives by apple and Google truly suggest we may not be driving anymore on our own in as little as 5 years….and then….the global recession overall drives down demand even further….

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Cheap Gasoline Isn’t as Good at it Sounds