With the price of crude oil hovering around $30 a barrel, the U.S. consumer is enjoying the lowest fuel prices in more than five years. But those same prices are wreaking havoc for the energy industry.
Low oil prices caused by a glut in supply, the entrance of U.S. oil onto the world market and high production from the Organization of the Petroleum Exporting Countries have been a boon for consumers. People are driving more and using more gasoline, and sales of vehicles are soaring.
“Lower prices for the consumer is always a great thing, it really is,” said Dan Kish, senior vice president for policy at the Institute for Energy Research. “People are feeling it.”
Consumers are feeling more confident about the economy. According to the University of Michigan’s consumer sentiment index, consumer confidence rose in January, continuing a four-month trend and reaching its highest level since July.
Richard Cutin, an economist at Michigan, said consumers have more positive expectations and personal financial prospects are at the highest level since 2007, before the recession.
He said he expects consumer purchasing to increase about 2.8 percent this year, specifically because of low inflation caused by relatively low energy prices.
“Consumer optimism is now dependent on the continuation of an extraordinarily low inflation rate,” Cutin said.
Cheaper fuel has meant record auto sales as well.
Almost 17.5 million vehicles were sold by automakers in the U.S. during 2015, up 5.7 percent from the previous year and breaking 2000’s record, the Automotive News Data Center reported.
Tellingly, sales of gas-guzzling pickup trucks and sport utility vehicles, which had slowed when fuel prices were about $4 per gallon, once again led the way last year, according to the Automotive News Data Center.
As the year drew to a close, buying increased even more. In December, more than 1.6 million vehicles were sold, up almost 9 percent from the previous December. That’s evidence of pent-up demand being unleashed, Kish said.
“There was this pent-up demand [they’re letting go] … because they finally feel as though it’s not just a short-term thing, it’s a sustained lower price environment,” Kish said.
But, what’s good for the goose is not always good for the gander.
U.S. oil companies laid off tens of thousands of workers as oil prices fell throughout 2015 and halted construction of new wells around the country. Some producers are exhibiting wariness about what 2016 will bring as oil closed Friday below the symbolically significant price of $30, the first time in 12 years.
Analysts at Citigroup told their investors earlier this week that companies on the Standard & Poor’s 500 Index are having trouble forecasting their future cash flows due to the volatility in commodity prices across the board, with crude oil foremost among them.
“Forecasting future cash flows and financial planning becomes a more difficult task for all,” Citigroup wrote in a memo to investors obtained by Bloomberg.
For oil producers, that means projects exploring for new sources of oil might be delayed or even canceled.
Wood Mackenzie, a global energy, metals and mining research and consultancy firm, said this week that 68 projects have been deferred, totaling about $380 billion, because of the collapse in oil prices.
“The impact of lower oil prices on company plans has been brutal,” said Angus Rodger, the principal analyst on the report. “What began in late 2014 as a haircut to discretionary spending on exploration and pre-development projects has become a full surgical operation to cut out all non-essential operational and capital expenditure.”
The end of 2015 was especially tough, according to the report. Twenty-two major projects were deferred, leading to 7 billion potential barrels of oil being left in the ground. All told, 27 billion potential barrels of oil were left in the ground in 2015 due to oil companies cutting back on production.
For Alaska, a state heavily dependent on oil for its revenue, that has meant a credit downgrade by Standard & Poor’s.
Earlier this month, S&P announced it was lowering Alaska’s general obligation debt to AA+ from AAA. Some bonds issued by Alaska also saw a downgrade.
Oil and gas production taxes account for almost 90 percent of Alaska’s general fund revenues each year.
“This is the most imbalanced budget of any state,” John Lombardi, associate analyst at Moody’s Investors Service, told Reuters.
It’s hard to imagine the energy industry helping out Alaska in the short term.
The Energy Information Administration, the Department of Energy’s independent analysis arm, predicts oil prices eventually will increase but price swings should be expected.
In the agency’s short-term outlook released earlier this week, government analysts predicted crude oil prices would hover around $40 per barrel in 2016, mostly due to the glut.
But, in the same analysis, it said no one really knows what’s going to happen.
“During the forecast period, oil prices could continue to experience periods of heightened volatility,” the report states. “The oil market faces many uncertainties heading into 2016, including the pace and volume at which Iranian oil re-enters the market, the strength of oil consumption growth and the responsiveness of non-OPEC production to low oil prices.”
With that kind of uncertainty, it will be tough for companies to justify spending millions of dollars on new wells in the Arctic when revenue is shrinking, Kish said.
“If it’s sustained, the places where it costs more to produce the oil than it’s worth are going to drop out,” he said.
Another of the contributing factors to oil’s decline, and the stock market’s dive this week, is the downturn in the Chinese economy.
China’s market volatility “could be contributing downward pressure on commodity prices,” the Energy Information Administration said. The analysis pointed out that crude oil in China got cheaper as the Chinese stock market closed due to stocks plunging earlier this month.
All this means consumers can be thrilled about low fuel prices continuing, but for the domestic oil industry it could be the start of another bleak year, Kish said.
“It could get darker before the dawn, in terms of domestic production,” he said.
