Oil

As most of you have probably noticed, oil at the pumps has been quite cheap lately.  Like, sub-2000’s cheap.  In this blog post I’m going to discuss how this massive change occurred, and also how it’s going to affect the United States economy.

First up, the reason that this change occurred is due to a massive increase in production that has dwarfed the increase in oil demand across the globe.  This change was for the most part facilitated by the expansion of the United States oil drilling, particularly shale in the Bakken, Eagle Ford, and Permian Basin.  You all have most likely heard of the Keystone Pipeline.  This pipeline is the main source of transporting the oil out of these regions.

Now, prior to this massive shale boom in the United States, oil prices were basically controlled by the Organization of the Petroleum Exporting Countries (OPEC).  This organization of countries (mostly middle-eastern) had a vice grip on oil for years.  They were the major cause of the Energy Crisis in the United States in the late 20th century, and basically have acted as an Oil cartel for decades.  The countries if threatened in the past could set up oil embargos, or decrease/increase production to meet demand.  However, in the past year the US production has reached a critical point where it can challenge OPEC’s production.

To put in perspective the massive effect that the US production has had on oil prices over the past year, one needs only look at the price per barrel of oil.  It peaked at 118 in Q2, and now heading into the end of Q4 (The period where oil demand normally INCREASES), oil is set at 67 and expected to stabilize at about 60.  Normally at this price, OPEC would cut production in order to skyrocket the price back to profitable levels, but the problem is the US production would not slow down in comparison, and therefore OPEC would simply be helping the competition and losing market share if they cut their own production.

Therefore, and perfect for the consumer, OPEC has decided to maintain levels in order to attempt to dissuade US production and put pressure one the production firms in the US.  However, technology has reached a point where even US shale oil is profitable at the current abysmal oil prices.  In my opinion, this “price war” as I deem it will ultimately result in a continuous decrease in prices unless China increases their industrial use of oil significantly (unlikely) or Europe/Japan recover dramatically in the next year (Probably not).  Therefore, I am at this point very bearish on oil, and I expect it t ocontinue to drop.

In terms of how this decrease in prices is going to affect the US economy, it comes down to the US increasing real disposable income of the consumer.  This is a radically significant gain for the country.  we are going to see major growth in Q1 and Q2 2015 in terms of GDP, Inflation, and other economic indicators.  The amount of disposable income spent on goods will increase exhorbitantly, and as such expect any consumer discretionary stocks to skyrocket in response to the increased spending.  Oil exploration and production companies will definitely damper the growth a little, seeing as this is basically their version of the apocalypse, but as a consumer and country, great things are on the horizon for us.