As I am writing this, oil has hit about $56 a barrel, which is down about 50 percent from just six months ago. While these new lows are helping us at the gas pump, the stock market is also lower. So what’s going on?
Since 2008, oil companies in the United States have increased production by about 70 percent, or 3.5 million barrels per day. Meanwhile, OPEC, which typically slows production to move prices up, has agreed to keep producing regardless of the low prices. Too much supply is chasing too little demand, especially with concern over slowing economies in China, Japan and Western Europe.
The price of gas has fallen in the past year to an average of $2.55 a gallon, but you can do better than that in Middle Georgia. I filled up my car last week for $2.07 a gallon because I use grocery-store fuel points. That one fill-up was a whole $1.50 per gallon less than I paid this past summer, saving me $16.50. According to AAA, the average family is saving $100 per month.
So, where does this money go? According to a recent survey by CNBC, only 8 percent of respondents plan to increase spending. Meanwhile, 13 percent say they plan to save more, and 12 percent will pay down debt.
So, how does this impact companies and their stock value? An airline’s largest expense (about 30 percent of its total budget) is fuel. So, low prices are lifting the profits of these companies. Also, companies that ship products, or have fleets of drivers, are benefiting. So, companies that benefit from cheap oil are more profitable, and their stock values will go up. And who’s hurting? Energy companies that need oil to be over $60 a barrel are concerned about how long prices will stay low. Some have borrowed a lot of money to produce oil and need higher prices to meet their obligations. Others are cutting back on expansion plans.
And what about countries that need oil to be more than $100 a barrel to run their governments? Iran, Iraq, Russia and Venezuela rely heavily on higher-priced oil and are struggling. Bank of America estimates that every $1 drop in the global price of oil costs Venezuela $770 million in annual revenue. These countries will have to dip into their reserves or borrow to make ends meet. On the other hand, China is the second largest net oil importer. A $1 drop in price per barrel saves the country $2.1 billion.
So, what happens next? As low prices become less profitable, supply will slow down, causing prices to move back up. So, enjoy that cheap gas while it’s available.
Sherri Goss is V.P. of Rosenberg Financial Group, Inc., with offices in Macon and Warner Robins. You can reach her by calling 922-8100, or via e-mail at email@example.com.