8.1.15

WHY ECONOMICS IS ABOUT TRADEOFFS.

I give you Chris Versace's "The Negative Effects of Low Oil Prices."
I hate to be Debbie Downer, but while you and other Americans will continue to reap the benefits of lower oil and gas prices, the effect has been different for oil companies such as Halliburton (HAL) and BP (BP). What’s been described by oil industry executives as a “Darwinian adjustment” has companies like those cutting jobs. Models from the Federal Reserve Bank of Dallas indicate that if crude oil remains around $55 per barrel, Texas could lose 128,000 direct and indirect energy jobs by mid-2015. Big independent producers including Marathon Oil (MRO), ConocoPhillips (COP) and Apache Corp. (APA) have said they’ll cut their 2015 capital budgets as they tighten their respective belts for oil price pain. Cuts like those can only result in a disaster for companies like Civeo (CVEO), a provider of housing for oil workers in the Canadian oil sands industry.

Gaming this fallout even further means negative pressure on oil industry revenues and earnings. We’ve started to see Wall Street start to catch up and slash oil and energy company expectations, but it’s the commentary on the upcoming earnings conference calls that will tell the tale of how bad things could get in the coming weeks.
Yes, companies expand capacity in anticipation of future returns, and yes, the Saudis are willing to bring in less money to fund the Sillies in order to defund the Persians, correctly treating their investment in existing wells as sunk.  But the point of markets is to allocate resources among competing uses, and if there are cheaper feedstocks for 3-D printer-assisted manufacturing in the United States, where the historic comparative advantage in advanced technology, knowledge-intensive goods manifests itself, so be it.
Candidly, I’m not all that optimistic we’ll see a big reversal in oil prices in the near term, because all of the data I have been looking at paints a picture of a slowing global economy. If you’re looking to double check my thinking, all you have to do is check in with Dr. Copper – whose second opinion confirms global growth is slowing.
Yes, those Chinese sweatshops that carry out routine production using archaic methods are going to have a tough time.  But cheaper oil does more to end developed-country reliance on sweatshop production and convict labor than all the lamentations of the Perpetually Aggrieved ever did.

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