Falling Oil Prices – Winners, Losers, And Economic Effect

 

No matter what news outlet you pay attention to, one of the biggest stories they’ve been following over the last several months has been falling oil prices. So today, I thought it would be fun to take a close look at who really wins and who really loses when oil prices drop. So, without further ado, let’s get right to it…

Low Oil Price Big Winners

Consumers – One of the biggest winners when it comes to falling oil prices is the consumer. In the United States one year ago, gas prices were near $4.00 per gallon. Today, gas prices hover between $2.00 and $2.50 per gallon depending on where in the country you are. Lower gas prices also mean lower costs for electricity, plastics, and other consumer goods that revolve around the oil industry.

Shipping Companies – Shipping companies are huge winners as the oil price continues to stay at a low. That’s because as the oil prices drop, demand from non-oil production countries increases dramatically. The neat thing here is that the law of supply and demand comes into play heavily in the oil industry; bringing up profits even further. Because demand has heavily increased for shipping to non-oil production countries the price for freight shipping has been on the rise. Lower oil prices means lower overhead for shipping companies; while increased demand creates higher prices!

Airlines – When it comes to airlines, the biggest expense that they have to worry about is the oil they use to fly their planes. In 2013 alone, US airlines spent a combined $51 billion on fuel expenses. As a matter of fact, the airline industry is so heavily dependent on oil that every penny per gallon change in the cost of fuel means $190 million difference for the US airline annual fuel cost. So, with oil prices falling so dramatically, airline overhead costs have fallen dramatically as well.

 

Low Oil Price Big Losers

The Energy Industry – It’s obvious that the biggest loser in the falling oil price game is the energy sector. Incredibly low oil prices mean lower profits for energy companies. As a matter of fact, many companies in the energy sector have slowed or even stopped production. Unfortunately, falling oil prices don’t just affect profits for the energy sector; the low prices also hurt investments. As a matter of fact, low oil prices are hurting energy stocks so badly that they are causing harm to entire blue chip indices.

Banks – Another industry that’s going to take a major hit from the low oil price dilemma is the banking industry. The reality is that the banking industry is the funding party for many major oil production projects. As the price of oil continues to decline, the oil production industry is struggling to reduce the cost of production in order to turn a profit. For many, the cost of drilling is higher than the amount of profit that they can bring in from the sale of the oil they produced. As a result, we have to imagine that banks with a good amount of money invested in the oil industry will start to feel the pain. It wouldn’t be surprising to start seeing reports of major banks losing tons of money to defaulted loans; and we could see loan growth slowing or even retreating. This could prove to be a huge hit to several banks.

The Steel Industry – Most major steel companies produce the pipes and other equipment used for exploration and oil drilling. Unfortunately, as the price of oil continues to decline, production in the industry has slowed almost to a halt. As a result, some major steel production companies are laying off hundreds of employees each because demand for their products has also slowed. Sadly, the steel industry in the United States isn’t the only part of the industry affected; steel suppliers around the world are feeling the pain.

 

Are Low Oil Prices Really A Good Thing?

At first glance, it seems like low oil prices are great for consumers, but bad for many industries and investors. However, when you dig deeper into the situation, it’s easy to see why everyone loses when oil prices fall on a long-term scale.

Think about it this way; the circle of economic activity is much like the circle of life. Each area plays a crucial role in the success of the entire machine. If this trend continues and banks do start losing quite a bit of money as a result, consumers are going to feel the pain when it comes to loan availability, fees, and interest rates.

Also, if we continue to see more and more industries affected by reduction in demand, we’ll continue seeing layoffs; ultimately leading to a hike in unemployment, more defaulted loans, and more pain on the US financial system and financial systems around the world.

Final Thoughts

In all reality, low oil prices are fun for the short term. However, long-term trends of down oil prices could create issues in other areas of the economy around the world. One of the big questions here is, “How long will low oil prices last?” The way things are looking right now, it looks like the answer is going to be at least a couple of years; which, in my opinion, is a very scary prospect. Thanks for reading; I’ll keep you posted as the story continues to unfold!