Cheap Oil Lifts Most Economies

12/22/2014


Prices for both U.S. and global crude benchmarks have fallen to five-year lows, down 48% from June highs, the sharpest six-month declines since early 2009.

Over the last six months, the S&P 1500 Energy Sector Index declined 25%, by far the worst of the 10 sectors, while the broader S&P 1500 gained 1%. That same dichotomy is playing out on the economic stage. Cheaper oil prices help most countries, as businesses and consumers spend less to power factories, homes, and vehicles. However, for countries that rely heavily on oil production to fund their economies, the arrow points in a different direction.

According to computer models prepared by Oxford Economics, with oil at $84 per barrel, Saudi Arabia's gross domestic product (GDP) can grow 4% a year. That compares to less than 2% GDP growth at $60 per barrel and roughly flat GDP at $40. The model projects recessionary conditions for Russia at $60 per barrel. In contrast, most nations — including the U.S. — should see growth accelerate when oil prices fall. The International Monetary Fund currently projects 2015 economic growth of 3.1% for the U.S., 1.3% for the euro zone, and 3.8% for the world.

In recent weeks we have trimmed our buy lists' exposure to energy stocks. The oil-price slide has also driven down the price of industrial stocks with exposure to the energy sector, while the threat of business failures is pressuring the junk-bond market, making financing more expensive to obtain, even for non-energy borrowers.

Keep in mind that GDP growth does not preclude weakness for segments of the economy. If oil prices keep falling, or even stabilize at current levels, oil consumers should profit at the expense of oil producers. And there are a lot more consumers than producers.

 


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