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Could falling oil prices be a double-edge sword? - Trade Only Today

Could falling oil prices be a double-edge sword?

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You’ve gotta love the fact that consumers are paying much less for gasoline and, therefore, have more cash to spend. It’s better for the economy than any government stimulus program and it bodes well for the marine industry.

That said, however, while we speculate these days just how low oil prices could go, we should also question where a balancing point might be that will sustain low prices for the long haul and prevent unintended political consequences. Only if prices at the pump remain comparatively low will boating see the fuel-cost-barrier to boat buying reduced.

Some have labeled the current drop in oil prices “oil shock.” Just last month, oil prices dropped 18 percent. Prices today are 38 percent less than they were in January. With crude now hovering around $66 per barrel (compared to $115 per barrel on June 19), there’s growing concern crude could drop below $40 per barrel. Why the benchmark of $40 per barrel? Black shale oil.

Energy markets were dramatically changed when hydraulic fracturing ushered in the great North American oil boom in the Bakken formation of North Dakota, Montana and Canada. Extracting the oil was very profitable at $115 per barrel and still good at $66 per barrel. But at $40 per barrel, while some shale producers will still break even, the price will be below the day-to-day costs at existing wells for many other producers. The International Energy Agency estimates for most drillers in the Bakken formation (the shale oil producers OPEC would love to drive out of business) $40-$42 per barrel is the red line. Bakken currently pumps 458,000 barrels each day.

So, in order for gas prices to stabilize at somewhere around today’s $2.50/gallon, it would seem best if oil prices never flirt with the $40-a-barrel level. So far, no one, including OPEC, shows any sign of reducing production to stabilize prices.

Looking forward then, some experts say the first supply cuts that could reverse low prices might come when currently operating wells run dry and drilling companies can't get financing to drill more. That’s because banks already have billions loaned out to oil producers. If they become unprofitable, the banks could be hit hard.

Increased demand could also change the equation. But experts ask where’s it going to come from, at least in the near term? Other than in the U.S., the general global economy isn't getting any better fast. In fact, if oil prices get too low, our enthusiasm could quickly end. That’s because there could be serious economic and political unrest in many nations negatively impacted by low oil prices.

For example, Paul Stevens, a fellow for energy, environment and resources at London’s Chatham House has called attention to this: “If governments (dependent on oil revenues) aren’t able to spend to keep the kids off the streets they will go back to the streets and we could start to see political disruption and upheaval. The majority of members of OPEC, for example, need well over $100 a barrel to balance their budgets. If they start cutting expenditures, this is likely to cause problems.”

Coddled by years of $100 crude, many governments spent their windfalls subsidizing everything from cheap gas to cheap food and housing to keep their growing populations of underemployed and underpaid citizens content. Those handouts could soon disappear and that will breed trouble.

So while lower crude prices are good for the U.S. economy, there must be real angst in the government offices of Russia, which can no longer rely on the same oil revenues to lift an economy suffering from European and U.S. sanctions; Iran will likely reduce subsidies that have kept its population in check; Venezuela, already in bad shape from failed political and economic policies; Ukraine, unsettled by a Russian-inspired war; the Middle East where countries fighting a rampaging Islamic State and in which the U.S. has been forced to become engaged; and add in Iraq, Angola, Algeria and other smaller oil-producing states that could face serious upheaval.

Bottom line: When it comes to prices at the pump, it’s a picture we can enjoy. Lower oil prices and cheaper gasoline not only reduce a barrier for people, especially first-timers, to buy our boats, but we can expect increased usage by boat owners and that helps marinas, services departments and other suppliers. But we cannot lose sight of balance . . . the delicate need for reasonable price stability in the future for this economic boost to be sustained.

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