The Oil Market Tanks Due To Bargain Basement Prices — Bad News or Is There a Silver Lining?

Yesterday’s dramatic fall in oil and gas prices, according to the President is good for consumers, and it is true that gas prices will immediately come down slightly at the pump — but the secondary effects could be far more negative than positive on the U.S. economy.  Why?  The U.S. is now a net exporter of oil and since the domestic oil production industry has grown so large, the investment bank Morgan Stanley predicts that “the pain of lower oil prices is likely to outstrip whatever positive boost cheaper gas prices might provide to U.S. consumers” particularly when compounded with coronavirus fears depressing the economy more generally.

Why This Matters:  When it comes to climate change, anything that incentivizes people to drive more or drives down the price of petroleum-based products like plastic is a step in the wrong direction.  The nearly 25% drop in oil prices on Monday was the largest one-day drop in price for the commodity since 1991 during the Gulf War — it occurred after the Saudis increased supply and cut the price to bargain-basement levels.   This price gauging move by Saudi Arabia could be an effort to drive its major competitors — the Russians and the U.S. — out of business.  The Saudis tried the same thing back in 2016 but the Trump Administration has kept the industry going since then with tax breaks and regulatory rollbacks and investors have lent them money to keep the good times going.  It was already looking iffy for the industry as the impact of coronavirus set in with a slow down in Chinese demand several weeks ago.  At that time, according to the Houston Chronicle, oil executives struggled to convince investors they could make money with Texas oil “priced at $58 a barrel.”  Now the price is hovering just over $30/barrel.  You do the math.  The Saudis might just succeed where climate activists never could have — to reduce oil and gas production here in the U.S. that made no economic sense, and direct more investment in solar and wind.  

Ripple Effects on Oil and Gas and Their Banks

According to CNN Business, “Energy stocks were clobbered. ExxonMobil (XOM) and Chevron (CVX) plunged more than 9% apiece, and BP (BP) tumbled 20%. Exploration and production companies suffered even steeper losses: Pioneer Natural Resources (PXD) plummeted more than 30%, while Occidental Petroleum (OXY)lost 40%.”  Bank stocks also took a big hit, because, the Wall Street Journal reported, “[s]harply lower oil prices could make it harder for energy companies to stay current on their loans. A rise in defaults would be painful for banks with sizable portfolios of energy loans.”  So both Bank of America and J.P. Morgan stocks dropped 15% and 14% respectively.  What that means is that low fuel prices will result in fossil fuel investments dropping and carbon-based projects could be canceled.  These changes were coming, but the drastic drop in prices may speed the change to clean energy that has a bright future — unlike oil and gas.

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