The Price Of Oil Is Crashing Again, And That Is Very, Very Bad News For The U.S. Economy

Oil Price Crashing - Public DomainThis wasn’t supposed to happen.  The price of oil was supposed to start going back up, and this would have brought much needed relief to economically-depressed areas of North America that are heavily dependent on the energy industry.  Instead, the price of oil is crashing again, and that is really bad news for a U.S. economy that is already mired in the worst “recovery” since 1949.  On Monday, U.S. oil was down almost four percent, and for a brief time it actually fell below 40 dollars a barrel.  Overall, the price of oil has fallen a staggering 21 percent since June 8th.  In less than two months, the “oil rally” that so many were pinning their hopes on has been totally wiped out, and if the price of oil continues to stay this low it is going to have very seriously implications for our economy moving forward.

One of the big reasons why the price of oil has been declining is because the OPEC nations continue to pump oil at very high levels.  The following comes from CNBC

Production in July by the Organization of the Petroleum Exporting Countries likely rose to its highest in recent history, a Reuters survey found on Friday, as Iraq pumped more and Nigeria squeezed out additional crude exports despite militant attacks on oil installations.

Top OPEC exporter Saudi Arabia also kept output close to a record high, the survey found, as it met seasonally higher domestic demand and focused on maintaining market share instead of trimming supply to boost prices.

These countries don’t know if or when the price of oil will eventually rebound, but what they do know is that they desperately need cash in order to keep their sputtering economies going.  Many of these nations are already experiencing significant economic downturns, and substantially reducing oil revenues at this time would definitely not help things.

Here in North America, oil production costs tend to be higher, and so when the price of oil crashes we tend to see companies shut down rigs.  But when rigs get shut down, that means that good paying jobs are lost.

During the first four months of 2016, approximately 35,000 jobs were lost at Texas energy companies.  Globally, more than 290,000 energy jobs have been lost since the price of oil started falling back in 2014.

And even though there was hope that energy companies would add jobs as the price of oil started rebounding during the second quarter, it turned out that the job losses just kept on coming

Energy companies continued to cut thousands of jobs during the second quarter, even though many chief executives are now voicing optimism that the oil market crash is ending and a rebound in drilling is afoot.

Although the heads of Halliburton Co. , Schlumberger Ltd. and other major firms forecast higher crude prices and a return to U.S. shale fields when discussing earnings this week, those companies and others disclosed another 15,000 industry layoffs.

Personally, I have quite a few members of my own extended family that live in areas that are heavily dependent on the energy industry, and three of them have lost their jobs so far this year.

And these are precisely the sort of good paying middle class jobs that we cannot afford to lose.  In order to having a thriving middle class, you need lots of middle class jobs.  Unfortunately, those kinds of jobs are going away, and the middle class in the United States is systematically dying.

If the price of oil keeps going lower, that will mean even more jobs losses for the energy industry, and that will be very bad news for the U.S. economy.

In addition, many of these energy companies are getting into very serious debt problems.  Delinquency rates on corporate debt are already the highest that they have been since the last recession as firms struggle to pay their bills.  Of course some of them have already gone belly up, and this has pushed default rates on corporate debt to the highest level since the last financial crisis.

At a price of 40 dollars a barrel, most oil companies in the United States are not profitable in the long-term.  The longer the price of oil stays down in this neighborhood, the more energy companies we will see go bankrupt.  At this point it is just a waiting game.

Also, it is important to keep in mind that Wall Street is very heavily exposed to the energy industry.  Just as subprime mortgages brought down quite a few financial institutions back in 2008, so this time around it is inevitable that the oil crash will claim a fair number of victims as well.

As the global economy has slowed down, the demand for oil has decreased.  And at this point, even the U.S. economy appears to be seriously slowing down.  U.S. GDP only grew at about a one percent rate for the first half of 2016, and the rate of homeownership in this country just hit the lowest level ever recorded.

In the mainstream financial media, there is a lot of hopeful talk about a potential turnaround for the energy industry, but most of that talk appears to be just wishful thinking.

To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East.  And of course that is definitely always a possibility considering who is running things in Washington.  But absent that, it is hard to see the price of oil getting back to 70 or 80 dollars a barrel any time soon.

So that means that we are likely to see more job losses, more debt delinquencies and debt defaults, and more financial institutions getting into trouble due to their reckless exposure to the energy industry.

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  • madrino

    Under a legitimate capitalist system, the price of oil going down should boot all other industries and be a net positive for the economy as the price of goods and services in most private and public entities should decrease. Additionally, the “competition” in the oil industry should have put downward pressure on this commodity. That is how it used to work.

    In upside down world, the interests of investors, hedge funds, venture capitalists, big banks and other entities that fabricate wealth without work is more important than the interests of businesses, consumers, communities and entire nations. Commodities ownership doesn’t have to take possession allowing derivatives (contrived equations of “investment and insurance” on nearly everything) to cover everything from water and air to food, housing and land and any combination that can be made up.

    • tom

      Exactly, madrino. Every single market is rigged – but still they lecture us incessantly about the superiority of their “free-market free-enterprise capitalism”! For God’s sake, once the interest rate is rigged, no other market can possibly function properly.

      • wildeyedliberal

        Aaahhh… All we need to do is figure out how to extract a ‘growing by exponential ergs’ amount of free energy from thorium reactors, and then from unicorn farts when that has a problem producing its promise. Throw interest into a biologic growth system and the end is likely an equation akin to the Club of Rome’s optimistic view of the future.

  • THE Guest

    Russia will be truly crushed because it intervened in the USA elections. Oil and gas prices will dig below historical support levels to lower and lower levels! Russia should mind it’s own business! Down with the oil & gas prices!

    • animalogic

      Russia “intervened” in the US election & should mind it’s own business ? I hope you are being ironic, otherwise you are drowning in the koolaid…

    • wildeyedliberal

      The organization most likely to have access to all of the missing everything, to all the DNC machines, and pretty much everything else is easy to identify: NSA.

      And they and the Russians and everyone else should go for a walk. Long one on a short dock.

  • andrew1212

    My suspicion is that the recent release of the 28 Pages is actually the US government attempting to pressure the Saudis to enter an agreement to “freeze” oil output (and stabilize the price). The release of the 28 Pages has nothing to do with the US government suspecting the Saudis of financing the 9/11 terrorists–If the US actually suspected the Saudis then the DoD-CIA would have been focused on them on Sept. 12, 2001. The USA also wouldn’t have been selling the Saudis such
    a large supply of weapons and jet fighters over the past few years (our government is Dumb, but not that Dumb!!!)

    Last fall/winter, when the price of oil tanked, all of a sudden the press started calling for the release the 28 Pages (after 15 years…why?). Then, last spring, Obama visited Saudi Arabia (twice)–before the first trip, all of a sudden, Bob Graham is on 60 minutes banging the 28 Pages drum again (remember?).

    It is my belief the Saudis were willing partners in providing the US
    with PATSIES for 9/11 (which is why many Saudis were allowed to leave
    the US in the aftermath of 9/11). It should be noted that Mahmood
    Ahmed, the head of Pakistan’s ISI, is also suspected of providing money
    to the 9/11 suspects–he was actually having a meeting with Sen. Bob
    Graham and Rep. Porter Goss on the morning of 9/11 in Wash, DC.

    The Saudis and the Pakistanis are very close–some even suspect the Saudis helped bankroll AQ Khan’s nuclear activities and that the Saudis have rights to at least one of Pakistan’s nuclear bombs. The USA is also very close to Pakistan–shortly after 9/11 the US awarded Pakistan a 10-year military aid package (which ran out in 2011–the year the US raided UBL’s hideout).

  • tom

    “To me, about the only thing that could push the price of oil back to where U.S. oil companies need it to be in the short-term would be a major war in the Middle East”.

    Ummmm, now how could something like that possibly happen? I suppose a revolution in Turkey, Syria, or Armenia might trigger a war. Or maybe an invasion of Yemen by Saudi Arabia, or the humming hotbed of terrorism that has taken over Libya since the overthrow and murder of Colonel Gaddafi. Or just possibly the vicious slughter of Palestinians that Israel engages in for everyday fun.

    All we need is for a full-function murderous conscienceless psychopath to become President of the USA. But surely that could never happen.

    • wildeyedliberal

      Isn’t that from the job description: “full-function murderous conscienceless psychopath to become President of the USA”? Wasn’t that on Monster Jobs .com??

      Oligarchic Economic Club looking for speaker to be public face of a large public relations and troubleshooting organization with a unique build of interlocking companies. Military experience and real world experience undesirable.

      Ideal candidate will be a full-function murderous conscienceless psychopath. Must enjoy getting up in the morning and have a zest for life; glibness and dissemblance must be well developed.

      Position: President of the USA

  • Bob

    I agree with madrino here. In a normal world, a lower oil (or gasoline) price is good for consumers. The same is true for a strong dollar. But we live in a twisted, backwards world where things are not what they seem. If certain employment is dependent on $100/barrel oil, that employment was never secure in the first place. I do have sympathy for these people who have or may lose jobs. Hopefully they can find some other income. Things are tough out there.