The Many Ramifications of the Great Oil Plunge of 2014

Most Americans are rejoicing at the big drop in gasoline and heating oil.  They are also counting a drop in air fare, food clothing, and other products as energy drops.  Landowners are worried about a drop in royalties. But CNBC, FBN, and other financial media say there are many more potential affects of the plunge, not all good.

A drop in employment is expected in the energy field as drillers cut back. As energy has been the largest driver in employment, that could hit the national rate.

Many of the most leveraged companies will either be bought out (Talisman was bought out just hrs ago) or go bankrupt.  This will affect investors from stock and bond holders to banks to investment firms  How will that ripple through the financial system?

Many hedge funds are heavily linked to energy stocks and bonds.  And it was hedge fund failures that led to the financial collapse in 2008.  Will we see a repeat of 2008?

The Russian ruble is in free fall since oil is Russia's only export. The ruble collapse of 1998 set of a global currency crisis. Will that scenario repeat?  Will Putin lose power or will he do something extreme to remain in power?

Many European countries are strongly tied to the Russian econ through exports and financial investments. Will the ruble free fall and/or a drop in exports take down the Euro econ?

Iran is also in huge trouble with oil so low, how will the mad mullahs react?

Venezuela and Brazil are seriously hurt since they are huge oil exporters. Will this affect the Latin American econ and bring down the US econ?

Lots more possibilities that none of us can foresee.  A drop in oil is good but this may have been way too far and way too fast.

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Permalink Reply by Billy Park Whyde on December 17, 2014 at 4:24am

In the 80s oil was around $11/bbl and jumped to $38. The price of a qt. of motor oil jumped as well as anything made of plastic. When oil went back down those products never returned to,their old prices. They can make up for a drop in oil prices by maintaining prices upon other commodities.  

Permalink Reply by LERRET on December 19, 2014 at 4:19pm

 They can make up for a drop in oil prices by maintaining prices upon other commodities

Who is "they"?  90% of the explorers do not own refineries, nor pipelines, nor do they have any other income source beyond the wellhead.

Permalink Reply by Joe on December 17, 2014 at 12:56am

Gee wiz Jim what did you have for dinner that you had night mares  and woke up with doom and gloom on your mind scaring people. Hind sight/ foresight. The more we see and learn the less we can predict the future. I'm talking about the college educated "experts". When things get this far out of hand as many a crisis have who is qualified to fix it? Obama? Oh yeah he's fixed things real good now hasn't he. Look at the history of "fixes". How about ethanol? How big a failure and corrupt an operation is that with the tax payers picking up the bills and damages caused by ethanol every day. Maybe wind power? No the tax payers are picking up the tab on that one also subsidizing and lining the pockets of the corrupt. Hey! the power company just gave me $50 for my old refrigerator. I wonder who's paying for that? Cash for clunkers worked out real good didn't it? Is it just a coincidence that every time the gov. tries to fix something the speculators and greedy people step in and ruin it? I guess I didn't sleep that good either.

Permalink Reply by Jim Litwinowicz on December 17, 2014 at 3:18pm

lol Joe.  Sleeping well...thanks for your concern.  Just wanted to point out that while most Americans are rejoicing the cheap gasoline, there are several issues that should attract concern.  Oil fell way too far, way too fast.

And I ain't asking the gov to fix anything.  But they need to be prepared to react when some of things I listed go wrong.

Permalink Reply by Scott Lake on December 17, 2014 at 3:12am

Met with a portfolio manager at Franklin Templeton Investments last week in the course of my business.  Energy dominated the discussion.  I related to her how we are seeing CAPEX either shifted away or indefinitely postponed in our area.  I asked her if they were seeing this anecdotally or across the board with US shale exploration.  Her reply was across the board and strongly hinted that it would last for a couple of years.  It is said that 20% of global junk bond issuance is energy related.  Much more fallout to come.

Permalink Reply by Dexter Green on December 17, 2014 at 9:38am

Contagion in the junk bond segment of the energy sector is almost a certainty.  It will not be contained in any way.  Energy HY bonds were what replaced bad mortgage paper when the market was dying for risk.  Same as it ever was, folks.

Permalink Reply by LERRET on December 19, 2014 at 4:22pm

Her reply was across the board and strongly hinted that it would last for a couple of years.  It is said that 20% of global junk bond issuance is energy related.  Much more fallout to come.

Spot on. This boom is a North American story. And the bubble (production bubble) does not exist outside this country. But the lack of demand from the U. S. is what is putting the pinch on OPEC members. No one else can pick up the slack. But shale oil is a rapidly depleting resource and within two years our production numbers will plunge.

Permalink Reply by Gas Boy on December 17, 2014 at 7:45am

The fall of oil prices, which is due to Saudi Arabia turning the valve full open and flooding the market with plentiful oil thus lowering the price of that commodity (contrary to what the other OPEC member nations want - Venezuela, Brazil), is probably a response to the Obama Administrations "directive" and will likely result in the election of the next President of the United States being a Democrat (Hillary). 

Remember, it was the U.S. that "saved" Kuwait, Bahrain, and Saudi Arabia from the wrath and advancing army of Saddam Hussein in 1990-1991.  Americans were complaining at the time that the U.S. should have been repaid in oil for sending our armed forces over to the Mideast to fight Saddams army.

Well, now the U.S. is calling and wants paid. 

Permalink Reply by Dexter Green on December 17, 2014 at 9:35am

Your first paragraph blends fiction and a misunderstanding of the basics of global supply/demand economics and turns it into some sort of odd conspiracy that is both unprovable and insipidly dumb.  I don't even know what to say beyond that.  If you want to learn about how the energy markets work then spend more time studying them and less time concocting stories (or reading others' concoctions).  

Permalink Reply by Gas Boy on December 17, 2014 at 10:31am

Then why are the Saudis increasing oil production if demand for oil is slowing?????

Permalink Reply by Joseph-Ohio on December 17, 2014 at 2:56pm
The prevailing theory seems to be that they're flooding the market to protect their 'market share'.

Other theorists believe that they can't do this for too long because their welfare state needs more income to be viable / sustainable.

I can't get passed how much dough they must have made by gouging the market for decades and can now seemingly so easily deeply discount their production. Maybe all I have to do is take a closer look at Dubais to get my head screwed back on straight about the wealth involved.

Just my read on it all FWIW (or not worth).
Permalink Reply by Jim Litwinowicz on December 17, 2014 at 3:15pm

The Saudis haven't increased production.  Other countries, like the US, have.  Demand is down slightly because of a slow down in China and a recession in Europe.  They have refused to decrease production unless other countries do also, which they have refused to do. 

The question is why?  Lots of possible answers like in the OP and perhaps more.

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