The barrel price of West Texas Intermediate crude oil has been falling since late June, and the fall is accelerating. Monday's closing price was $96.63; Tuesday's opening price was $94.02. Back in early July, I argued that oil's downward move was not over , but I confess, I'm surprised by the speed of the current drop. Factor in seasonal considerations, and the drop appears even more extreme, as oil prices tend to be high in August and September. Does that mean that we should expect oil prices of $90, $85 or even lower in October and November, when prices typically fall? I believe it does, for two reasons.
First, given the greatly increased supply of domestic oil, the main factor keeping the price of oil high in the early to mid-summer months was concern over geopolitical conflicts that threatened the supply of oil in Iraq , Russia , and Libya (as well as Sudan/South Sudan and other African nations). The conflicts have not gone away, but the oil hasn't been cut off for a simple reason: only the most unsophisticated armed forces ever seek to destroy oil production capacity - most want to seize it for themselves - and the unsophisticated forces are inevitably defeated by the more sophisticated ones. ISIS/ISIL appears to be among the unsophisticated, and while their rapid advances always make headlines, it now appears that they are just as rapid in retreat .
As for Russia, they may cease to sell their oil and gas to the US or to Europe if they are mad enough at us, but they will sell it somewhere , and wherever they sell it, the end result will be the same: it will have exactly the same effect on world supply and demand. As for the fear of escalation, I believe it is overblown, and it's a foolish fear to bet on, in any case. When the US and Russia are engaged in brinksmanship, "escalation" means there will be nothing to collect if you win your bet, and nothing to spend it on if you could.
The second reason is much simpler: the big oil companies over-drilled. Consider the $106 billion in new debt that big oil has taken on in order to fund its monster offshore oil development projects. With more and more shale oil becoming available through smaller companies, big oil felt that it needed these projects to keep from being boxed out, but even so, they make no sense given today's price of oil. If you believe nothing I else I say, believe that there are a lot of sweaty foreheads today in the executive offices of Exxon ( XOM ), Chevron (cvx), Total SA (tot), Royal Dutch Shell (rds.a), BP ( BP ) and Conoco Phillips (cop). Low oil prices could also slow the rate at which the US and global population move towards hybrid and electric vehicles, which is bad news for Toyota ( TM ) and Tesla ( TSLA ), at least in the short run.
That takes care of the losers, and as for the winners, that should be clear as well: everyone else. While the US did enjoy cheap oil for a time after the financial crisis, we were also cursed with serious underemployment. Now that employment is back at pre-crash levels, gasoline for less than $3 per gallon will mean the economic recovery will actually start to feel like an economic recovery - for the first time, for many Americans. And if (though it's still a pretty big if) gasoline should fall to less than $2.50 per gallon, a lot of young Americans may get to experience something they've only read about in history class: prosperity.
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC .
This article was originally published on MarketIntelligeneCenter.com
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