Low gas prices are a double-edged sword - Trade Only Today

Low gas prices are a double-edged sword

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Boaters are having a great summer with gas seeing the lowest average price per gallon in mid-summer since 2009. Moreover, gas on the highways could be headed for $2 a gallon again. But while low prices leave consumers with more cash to spend and fuel the economy, job cuts and an eventual drag on the economy can also be the result.

Gas prices are primarily being driven by lower oil prices, of course. For about four years, oil prices floated around $100 a barrel, but they’re now 50 percent less at $45. Moreover, many analysts expect oil to remain in the low $40 range for the foreseeable future. OPEC isn’t reducing production, Iranian oil is set to flow out from under sanctions and record U.S. production continues to add to supplies.

As consumers, we don’t think about it, but cheap oil hurts profits. And that’s a negative. In fact, the oil industry has seen its profits plummet and the resulting impact on jobs and capital spending has not been good. For example, Shell Oil Company announced it will cut 6,500 jobs in response to continued lower gas prices. "Today's oil price downturn could last for several years,” CEO Ben van Beurde told Bloomberg, “and Shell's planning assumptions reflect today's market realities."

The Associated Press reported that Shell’s 2015 second-quarter net income fell 25 percent year over year. In addition to the job cuts, Shell will trim operating costs by $4 billion and capital expenditure plans will be lowered by $7 billion this year.

A similar story comes from Exxon Mobil, which saw its profits fall to the lowest level since the recession in 2009, with U.S. operations posting a second consecutive quarterly loss. It resulted in a spending reduction of $1.54 billion in the second quarter and that has a negative ripple effect.

Chevron CEO John Watson said his company is reducing its workforce by 1,500 “to reflect lower activity levels going forward.” Chevron’s quarterly profit fell 90 percent.

Just as booming oil production helped the economy grow following the recession, the sharp cuts in spending and employment that we’re starting to see now will eventually have a negative impact. Overall, it’s estimated there was a $29 billion decline in oil exploration and related activities in the country in the second quarter alone. If that continues it will cut into the current economic growth, which isn’t great to begin with.

Texas is the oil bellwether state and will likely feel any economic decline early. According to Ken Lovell, executive director of the Boating Trades Association of Metropolitan Houston, what’s happening is cause for concern.

“So far, our dealers are having an up year,” Lovell said, “but we are very aware of the changing outlook in the oil and gas industry and we’re closely monitoring the situation. Obviously we don’t need this while we’re still working toward a fully recovery from the Great Recession.”

Bottom line: It would be best if oil prices leveled off and remained close to $50 a barrel. It would mean gas prices wouldn’t likely hit the $2 level, but would remain relatively low to keep providing a boost to consumer spending while eliminating the negative impact of needed workforce reductions and cuts in major spending by the oil industry and companies that serve it.

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