The Good, The Bad, and The Ugly: Cheap Oil

The Good, The Bad, and The Ugly: Cheap Oil

            Well we have wanted lower gas prices for quite some time now, probably dating back to late 2008 after they started recovering after the financial crisis. Back then the price dropped because of risky commodity trading followed up by an imploding financial world. Today I would be willing to bet it has come on the heels of our home grown oil boom. Bad thing? I say nay, but it is possibly too soon to tell. In spite of that let’s analyze the good, the bad, and the ugly in this oil crash.  

            The worst news will only get better with time so let’s start with the ugly first. The drop in oil prices will stifle the exponential growth in the U.S. oil boom. There is always a price point in oil where it is no longer profitable to extract it, refine it, and sell it, it all depends on the type of oil being extracted, and what method it is being extracted with. Unfortunately for the U.S. our price point is quite high sitting anywhere form $50-$70 compared to OPEC’s lowest of $4-$6 (Saudi Arabia). We are already catching wind of Oil producers cutting back on investments to hedge future losses of profitability because of this drop. British Petroleum (NYSE: BP) is even spending money in hopes to save money in the future by using $1 Billion to restructure their company.

If oil prices drop further U.S. companies will be forced to cut back on investments, this would put a damper on solid U.S. economic growth that we have been calling for. If the price goes lower and stays that way some companies might be forced to sell off assets and/or go out of business. Jobs will be cut, research and development will be scaled back, and exploration will slow all to save money. This could cause quite the ordeal in the U.S. possibly creating another recession. Would it destroy U.S. oil production? No, but it sure would hamper its growth.

            The bad is not really all that bad, at least for us that is. A lot of people more than likely lost money on this price drop, not just the oil companies, but people that trade oil as a commodity or the company’s stocks. They panicked when the price of oil dropped and sold off their assets to prevent incurring and further losses. While losing money is a common occurrence on Wall Street it prevents these companies from putting those profits back into the market possibly stifling growth further. And as long as those losses are not cripplingly large it won’t hurt the common consumer all that much.

            The good is actually linked closely to the ugly and the bad in this case as is often in crashes that occur in the market. What makes this crash more exciting than many others is that if done correctly Investing in the Oil Industry can be very profitable. The environment right now is very comfortable to make an investment in an oil company. This crash offers many companies at a largely discounted rate such as Devon Energy (NYSE: DVN) down about 25% from about six months ago. Many of these companies also offer a very attractive dividend sometimes approaching the 6% range as is the case with British Petroleum (NYSE: BP). Remember be greedy when others are fearful, but don’t let your greed blind you from conducting proper research on the investment you are making.  

            Will oil prices continue to drop? I could not really tell you, but if they do it will create an even bigger discount for those established oil companies that can weather this storm. You will never time the market correctly but if you never take the time to make the investment you will miss out on it. And if you decide not to invest in this value you will at least be saving money at the gas pump.