U.S. CON­SUMERS SEE UP­SIDE OF FALL­ING ENERGY PRICES

Newsweek - - DOWNLOADS -

The mar­kets are heav­ing over fears of a China-fu­eled global slow­down, but for Amer­i­can con­sumers there’s good news here: They will be pay­ing less as a per­cent­age of dis­pos­able in­come for their energy than they did in 1960.

This year, Amer­i­can house­holds are ex­pected to pay an es­ti­mated $700 less on av­er­age for energy ex­pen­di­tures than in 2014—a wind­fall that is ex­pected to last through 2016, ac­cord­ing to econ­o­mists at the Energy In­for­ma­tion Ad­min­is­tra­tion (EIA), the sta­tis­ti­cal arm of the U.S. Depart­ment of Energy. “We’re fore­cast­ing the av­er­age re­tail price of ga­so­line will be $2.11 a gallon in the last quar­ter of this year,” says Ti­mothy Hess, with the EIA’S petroleum mar­ket anal­y­sis team. “And ga­so­line prices are ex­pected to stay be­low $3 for all of 2016.”

Af­ter that, the mar­ket is likely to re­bal­ance and prices will firm up, says his col­league, Vipin Arora, from the EIA’S macroe­co­nomic team. All of which means Amer­i­cans will get some much-needed re­lief for roughly one year. “You don’t pay so much for gas, so you buy a TV,” Arora says. “And that adds to dis­pos­able in­come and con­sump­tion, which rep­re­sents about 70 per­cent of the U.S. econ­omy. When con­sumers have more in­come avail­able to them, they spend more, and com­pa­nies hire more peo­ple to meet ris­ing de­mand.”

Con­sumer spend­ing is es­ti­mated to be ex­pand­ing at a 3.1 per­cent an­nual rate, with the Fed­eral Re­serve re­port­ing solid gains in the econ­omy, which grew at a 3.7 per­cent pace as of the sec­ond quar­ter. Dis­pos­able in­come is on the rise, with the Bureau of Eco­nomic Anal­y­sis re­port­ing it reached $118.6 bil­lion in the sec­ond quar­ter, up 3.7 per­cent. That’s not a lot, but it’s not bad ei­ther.

With that ex­tra jin­gle in their pock­ets, Amer­i­cans—most of whom have been weighed down by stub­bornly stag­nant wages—could give the econ­omy a boost, says John Kil­duff, found­ing part­ner of Again Cap­i­tal, a New York–based hedge fund spe­cial­iz­ing in com­modi­ties in­vest­ments. “It should be a great back-to-school shop­ping sea­son, a great hol­i­day sea­son this year for or­di­nary Amer­i­cans who likely will want to spend some of what they’ve saved on energy costs,” he tells Newsweek. “Since up­ward of two-thirds of the na­tion’s

econ­omy is driven by con­sumer spend­ing, this will be a mul­ti­plier in many ways.”

All of which puts this global slow­down in a slightly dif­fer­ent light.

For those still catch­ing up with the mar­ket’s wild ride in re­cent weeks, an un­ex­pected move by China to de­value its cur­rency, the yuan, in early Au­gust, ig­nited a global eq­ui­ties and com­modi­ties sell­off on jit­ters that the world’s sec­ond­biggest econ­omy (af­ter the U.S.) might be hit­ting a wall.

Eco­nomic data from China are of­ten un­cer­tain at best and flat-out in­cor­rect at worst, so the sud­den de­val­u­a­tion spooked in­vestors, most of whom didn’t see it com­ing and won­der what’s com­ing next. The re­sult­ing tur­moil has raised the specter of the 1997-1998 Asian fi­nan­cial cri­sis, pum­mel­ing U.S. stocks from Au­gust into Septem­ber and in­creas­ing ex­pec­ta­tions that the Fed might wait un­til 2016 to raise in­ter­est rates, ini­tially seen ris­ing in Septem­ber.

Bei­jing cut its own in­ter­est rates and bank-re­serve re­quire­ments—one of sev­eral times it has in­ter­vened to main­tain growth this year—as the mar­ket pared losses and econ­o­mists pro­nounced the era of rapid growth in China over, although more likely to re­sult in a con­tin­ued de­cel­er­a­tion than a bona fide crash. “The cur­rent panic is es­sen­tially ‘made in China,’” wrote Ju­lian Jes­sop, chief global economist at Cap­i­tal Eco­nom­ics Ltd., a Lon­don-based macroe­co­nomic re­search firm. “The re­cent data from other ma­jor economies have gen­er­ally been good, and there is lit­tle to jus­tify fears of a ma­jor global down­turn.”

In fact, the panic is some­thing from which all global energy con­sumers stand to di­rectly gain. Be­cause China is the world’s largest con­sumer of com­modi­ties—which in­clude oil and petroleum prod­ucts, like ga­so­line—the pull­back in its econ­omy is one of the key driv­ers of this sum­mer’s eight-week los­ing streak in oil prices.

The strength­en­ing U.S. dol­lar, in ex­pec­ta­tion of a Fed rate hike, has also added to the pres­sure. Be­cause oil is priced in dol­lars, it takes a greater amount of for­eign cur­rency to buy a bar­rel of oil when the dol­lar is strong. (The op­po­site is true when it’s weak.) The re­sult is that the price of U.S. crude oil fell to a six-and-a-half-year nadir last month. On Au­gust 24, the West Texas In­ter­me­di­ate bench­mark closed be­low $40 a bar­rel for the first time since the 2008-2009 fi­nan­cial cri­sis. Just a year ago, it was hov­er­ing around $100 a bar­rel. Mean­while, the Euro­pean Brent crude oil bench­mark slid be­low $45 a bar­rel. Since that drop, both have drifted higher, but have re­mained un­der heavy pres­sure.

“It’s a stim­u­lus for the econ­omy, be­cause 80 per­cent of the crude oil that’s pro­duced goes straight to­ward trans­porta­tion,” says Kil­duff, who ex­pects air­line, ship­ping and truck­ing com­pa­nies’ stocks to ben­e­fit. “So it’s im­prov­ing the cost of run­ning trains, planes, trucks, cars.”

As the mar­ket whip­sawed over China, many in­vestors and econ­o­mists missed another pos­i­tive de­vel­op­ment— a re­bound in con­sumer con­fi­dence last month, Kil­duff said. “Fall­ing com­mod­ity prices, es­pe­cially oil, and a strength­en­ing dol­lar are the pri­mary rea­sons be­hind these de­vel­op­ments,” wrote an­a­lysts in a re­search note from Credit Suisse. “But those mar­ket moves are closely re­lated to the on­go­ing weak growth in China, and on­go­ing eco­nomic strength in the United States.”

Another re­sult of low oil prices? Soar­ing de­mand for oil on a global scale—in fact, the fastest-paced growth seen in five years, ac­cord­ing to the Paris-based In­ter­na­tional Energy Agency, which ad­vises in­dus­tri­al­ized na­tions on energy, adding that the “above-trend” surge is likely to con­tinue into 2016. Global oil de­mand is ex­pected to grow by 1.7 mil­lion bar­rels a day in 2015, the IEA pre­dicted, re­vis­ing its forecast up­ward in Septem­ber and Au­gust, and pre­dict­ing de­mand would rise a fur­ther 1.4 mil­lion bar­rels a day in 2016.

In the U.S., con­sumers are de­mand­ing more petroleum prod­ucts than they have in years, with sales of gas-guz­zling SUVS and trucks soar­ing. Dur­ing the sum­mer driv­ing sea­son, au­tomak­ers re­ported sales that nearly dou­bled an­a­lysts’ ex­pec­ta­tions, putting them on course for the best sales year in a decade, ac­cord­ing to in­dus­try re­search firm Au­to­data Corp. “We have seen a de­mand re­sponse to lower prices,” says Jim Rit­ter­busch, an energy an­a­lyst at Rit­ter­busch & As­so­ci­ates in Galena, Illi­nois, who ob­serves that pent-up con­sumer de­mand means that Amer­i­cans are not only buy­ing more cars, but clock­ing more miles on the road. “Ga­so­line is a part of the energy com­plex where de­mand is keep­ing pace with pro­duc­tion,” he says.

The same has not been true for oil. No­tably, the high de­mand has been un­able to sop up the ris­ing glut in global sup­ply. The fever­ish pump­ing of oil, fed by the U.S. shale boom, has led to a “stag­ger­ing” global over­sup­ply of 3

mil­lion bar­rels a day, the IEA es­ti­mated this sum­mer, the largest “over­hang” since 1998.

Oil pro­duc­tion in the U.S. will hit 9.22 mil­lion bar­rels a day in 2015—the high­est level since 1972, ac­cord­ing to the Depart­ment of Energy’s sta­tis­tics arm, the EIA.

Next year is ex­pected to be the first time the U.S. de­creases year-over-year pro­duc­tion since 2008, says EIA’S Hess. “Pro­duc­tion is al­ready start­ing to de­cline this year into the fourth quar­ter,” he says, adding that since the be­gin­ning of the U.S. drilling boom in 2009, “we have in­creased pro­duc­tion by an av­er­age of 10 per­cent a year.” In 2016, the EIA sees pro­duc­tion fall­ing by 400,000 bar­rels a day, about 4 per­cent.

Tum­bling prices have eroded the prof­its of oil drillers and ex­porters, which have been forced to ax projects and work­ers to al­low de­mand to catch up. Cut­backs have to­taled $180 bil­lion so far this year—the deep­est since the oil crash of 1986, ac­cord­ing to IEA. The prob­lem is par­tic­u­larly cum­ber­some for ma­jor oil com­pa­nies in the United States, which bans the ex­port of oil but now has an oil stock­pile that’s 25 per­cent above last year’s level, even af­ter tak­ing the brunt of the high-de­mand sum­mer driv­ing sea­son.

The frothy sup­ply sit­u­a­tion is un­likely to be helped by what ap­pears to be a three-way fight brew­ing in the oil­rich Mid­dle East among Saudi Ara­bia, Iraq and Iran, which are vy­ing for mar­ket share by pump­ing more oil. Af­ter its land­mark nu­clear deal in July, Iran will strive “to re­claim its spot as the Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries’ big­gest pro­ducer af­ter Saudi Ara­bia,” the IEA pre­dicted.

Last Novem­ber, Saudi Ara­bia, OPEC’S de facto leader, made clear it would not make a uni­lat­eral cut to its oil pro­duc­tion to boost prices, ramp­ing up oil pro­duc­tion to make up for lost rev­enue from the fall­ing prices. The pumpall-you-can gam­bit, how­ever, has not been work­ing for economies re­liant on oil. The In­ter­na­tional Mon­e­tary Fund projects a $150 bil­lion bud­get deficit this year for OPEC’S

top pro­ducer, Saudi Ara­bia—equiv­a­lent to 20 per­cent of its gross do­mes­tic prod­uct.

By late Au­gust, OPEC, as a group, is­sued a bul­letin stat­ing that it “stands ready to talk to all other pro­duc­ers” in hopes of ce­ment­ing “fair and rea­son­able prices.” In the past, OPEC has some­times cut pro­duc­tion to in­crease the scarcity of oil and goose prices higher, but it is un­clear whether it can achieve the con­sen­sus to do so now. Al­ready, NON-OPEC coun­tries are ex­pected to slash sup­ply in 2016 due to lower prices, ac­cord­ing to the IEA.

While the scal­ing back of energy projects in the U.S., along with high de­mand for energy en­cour­aged by low prices, is seen as even­tu­ally push­ing prices back up by late 2016, “many par­tic­i­pants in the oil in­dus­try have adopted a new mantra: ‘lower for longer,’” the IEA said.

Could the price on a bar­rel of oil touch the $20s—a level not seen since 2002, be­fore the U.s.-led war in Iraq? Most don’t think so. “Events have been set into mo­tion on the down­side that are likely to keep prices low for a while, but I am not in the camp that says we’re go­ing into the $20s,” Rit­ter­busch tells Newsweek. “I can see the low-to-mid-$30s, but the $20s will be quite a bit of a chal­lenge.”

Credit: Billy H.C. Kwok/bloomberg/getty

De­mand for oil in China, de­spite its eco­nomic slow­down, re­mains high.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.