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The Oil Plunge: The Facts & Why We Should Care

The Oil Plunge: The Facts & Why We Should Care

January 1, 2015

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According to The Wall Street Journal four of the five worst stocks in 2014 were oil/energy related and the fifth was Avon.  Gas prices were cheaper and women were opting for more expensive cosmetics? I’m guessing that’s probably not the case.

  1. TRANSOCEAN LTD. – DOWN 62%
  2. DENBURY RESOURCES INC. – DOWN 50%
  3. NOBLE CORP. – DOWN 47%
  4. ENSCO PLC – DOWN 46%
  5. AVON PRODUCTS INC. – DOWN 44%

Prices at the Pump

Gas prices at the pumps hit a four year all time low, which is great for us; but, does this savings come at too high of an eventual cost or are we just really looking for problems where there aren’t any?  There is no simple answer if there is one at all.  Economists, environmentalists, scientists and politicians all have theories (often conflicting) but do have one slick concept in common- peak oil.

Peak Oil

The concept that since oil is non-renewable, there will be a point in the future at which the rate of extraction will hit a peak and thereafter will decline. The model and term, peak oil was first introduced by M. King Hubbert in 1965. This term should not be interchanged with oil depletion, as that is the period where oil reserves become depleted, whereas peak oil describes the point at which we will hit maximum production, the peak of oil production.

Mike “Mish” Shedlock gives a nice breakdown on his take in What’s Behind the Plunge in Oil? Winners and Losers? Boon to Spending or Recessionary? Shedlock uses Occam’s Razor, a principle that suggests the simplest workable explanation is likely to be the best one which and in turn dispels of what he considers conspiracy theories. Shedlock’s breif overview of his theories explaining the oil plunge:

Slowing global economy, especially China and Europe
US production expansion
OPEC pumping above quotas – they all cheat
Iran embargo failing
Increased fuel economy
Attitudes of millennials towards cars and driving

According to Shedlock:

The US saw an increase in production not because there is abundant supply, but rather because prices got high enough to make diminishing supply profitable to exploit. After all, that’s what peak oil is about.
And with this plunge in oil, new development has come to a halt. Many of these drillers are not profitable at these prices and huge numbers of bankruptcies will result.

Shedlock’s theory that many drillers are not profitable is consistent with The Wall Street Journal’s article in that four of the five worst stocks in 2014 were in fact oil related drilling companies.

Shedlock references the Financial Times infographic of winners in losers in the oil game.

winners and losers Financial Times Infographic

A Motley Fool article 2 Ways Plunging Oil Prices Could Threaten the U.S. Economy confirms the same two problems cited in Shedlock’s article the increase of job loss and junk bonds are tied to an oil plunge.   Fact based evidence over time is the best indicator of the future and while we’re enjoying the prices at the pump we want to deter another repeat of Michael Milken’s junk bonds from the late 1980’s.

Michael-Milken-Contra-Costa-USA-227x300

For updated information: Peak Oil News & Message Boards 

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