The Trouble With the Falling Oil Price

purch

It's hard to make a case that an Oil price much lower than it currently sits will be good news for anyone in the longer term.

Generali

MinerSteve wrote: »

Where do you think the bottom will be for oil? back to 35? Maybe 45 will be the bottom.

No idea. The Infrastructure guys pointed out that $45 would be a reasonable low but if it hits that sort of price to expect a pretty rapid bounce-back.

MinerSteve wrote: »

One thing is for sure, this deflationary spiral is lowering prices of everything, its good news for us poor people. Bad news for wealthy people who have lots of investments.

Maybe. Bad news for oil investments, good for car manufacturers.

MinerSteve wrote: »

I wanted to buy an electric car, but with falling oil prices I'll stick with my cheap petrol car.

See!?

Thrugelmir

Generali wrote: »

Ultimately you don't need to pay more than a tiny fraction of your debts back because holders of the debt would rather get a tiny fraction back with you continuing to drill than none at all if you don't.

If the fracking companies default on their debts then there's the potential for another financial crisis. As the sums at stake are huge apparently. The US debt markets are larger than the FTSE.

Generali

Thrugelmir wrote: »

If the fracking companies default on their debts then there's the potential for another financial crisis.

TBH, I doubt if the impact would be that huge. Don't forget that the vast majority of the debt would have started off as junk. This isn't stuff that banks are going to be holding vast amounts of as reserves and it's very unlikely that many people would hold large amounts of their wealth in.

According to Reuters:

http://www.reuters.com/article/2014/12/02/us-oil-prices-funds-idUSKCN0JG0CQ20141202

Energy issues only make up 16 percent of nearly 2,300 issues covered by the Merrill Lynch High Yield Index.

So of the US junk bond market, about 1/6th is energy companies of all types.

A typical Balanced fund might be 60:40 shares:bonds. Of those bonds I'd not imagine even a quarter to be junk but let's say for the sake of argument that they are. Then someone might lose 1/6th of 10% of their pension savings/wealth if all of the Energy company bonds went to $0, less than 2% of their wealth.

As for the contagion? Well other oil companies are going to find it hard to borrow so expect a mini-recession in oil exploration companies and those companies which support them. That sounds pretty bad for the Middle East and Russia. Australia to a lesser extent. Maybe some revolutions or maybe even a war but a GFC? I don't see it.

CLAPTON

purch wrote: »

It's hard to make a case that an Oil price much lower than it currently sits will be good news for anyone in the longer term.

I can't see why permanently low energy prices aren't good news for the vast majority.
In fact one looks forward to the time when the price of oil is virtually zero due to lack of demand.

Generali

CLAPTON wrote: »

I can't see why permanently low energy prices aren't good news for the vast majority.
In fact one looks forward to the time when the price of oil is virtually zero due to lack of demand.

It's getting like that with coal.

System

At the start of your post you refer to the effect of price RISES on an oil importing country, then near the end you seem to be talking about the effect of FALLING prices on an oil exporting country.

Are you talking about the effect on the Russian economy or the British?

Generali

Clifford_Pope wrote: »

At the start of your post you refer to the effect of price RISES on an oil importing country, then near the end you seem to be talking about the effect of FALLING prices on an oil exporting country.

Are you talking about the effect on the Russian economy or the British?

If that's aimed at me then I mean oil importing developed economies including the British.

purch

CLAPTON wrote: »

I can't see why permanently low energy prices aren't good news for the vast majority.
In fact one looks forward to the time when the price of oil is virtually zero due to lack of demand.

Certainly, but getting from where we are now to a point where demand for Oil is extremely low will take a long time, and any obstacles that appear to slow down the development of alternative energy sources (and cheap Oil must be consider a potential obstacle) are bad news.

CLAPTON

purch wrote: »

Certainly, but getting from where we are now to a point where demand for Oil is extremely low will take a long time, and any obstacles that appear to slow down the development of alternative energy sources (and cheap Oil must be consider a potential obstacle) are bad news.

presumably you are referring to climate change issues rather than the economics of cheap energy