Tumbling oil prices have had many investors feeling trepidatious lately. But are the declines bad news? Good news? Charles Schwab Chief Investment Strategist Liz Ann Sonders says it’s some of both — but more good than bad.
“There are offsetting negatives to the positives associated with lower oil prices,” Sonders writes in commentary on Schwab’s web site. “If the drop in prices continues, drilling and extraction activity will weaken, which would hurt not only the energy industry and the states which dominate that industry; but the providers of equipment to it as well. But the positive impact on consumers and businesses outside of the energy sector (which is a larger portion of the US economy) will outweigh the negatives.”
Sonders points out a number of interesting facts about the current oil situation. She says that while growth in demand may be slowing, “world oil demand is still rising, and hasn’t dipped to a level below the prior year since the ‘great recession’ era in 2008/2009.” Supply, she says, is the real driver of oil’s decline. “For several years, investors and market-watchers have chronically underestimated crude oil production by both the United States, and even within OPEC,” she explains. “The United States is now the world’s largest oil producer (having taken the top spot from Saudi Arabia this year). Over the past four weeks, US oil inventories have increased by over 23 million barrels. According to Bespoke Investment Group (BIG), that is the fifth largest four-week increase since 1983, and the largest four-week increase since February 2009.”
On the downside, Sonders says that both GDP and employment are markedly better in oil-producing states than non-oil-producing states, and that the employment “multiplier” for energy-company-driven growth is “fairly large”. That means lower oil prices — and lower profits for oil firms that could crimp their capital expenditures — could certainly act as a drag on the economy. But overall, she doesn’t think that those negatives will be enough to offset the positives created by significantly cheaper oil.