Six years ago the nation reeled as a spike in oil prices sent gas to $4 a gallon. Airlines and automakers laid off thousands of people, gas hoarding caused at least a few garage fires, and the Prius all of a sudden seemed like a cool car.
This fall it’s a different story: In the past five months global crude prices fell about 25%, sending gas to around $3 a gallon. But where once there might have been dancing in the streets, investors greeted the news mostly with trepidation.
What changed? Fuel production over the past few years has become one of the country’s most profitable and fastest-growing industries. More than 200,000 Americans now work in oil and gas extraction, according to the Bureau of Labor Statistics. Estimates peg the total jobs created by the industry at upwards of 2 million. By 2020 up to 4% of U.S. GDP could come from the sale of oil and gas. To be sure, there’s still plenty to be happy about in the falling cost of oil: Each cent that comes off the price of gas translates to more than $1 billion in consumer savings. But low prices are no longer an unalloyed blessing.
Here’s how cheaper oil could play out.
With global crude fetching between $80 and $90 (what Raymond James associate Carlos Newall calls “the new normal”) instead of the $90 to $110 of recent years, most U.S. Companies will be fine. Even though that’s uncomfortably close to the break-even point for U.S. Producers, roughly $45 to $60 a barrel. Mark Sadeghian, a senior director at Fitch Ratings, says the lower prices will take a toll on smaller, more debt-laden companies and those far from the shale fields’ “sweet spot,” where oil is easiest to extract. But the price would have to fall sharply further—to as low as $50 a barrel in the U.S., Citigroup analysts say—before production would significantly slow or halt.
Lower prices will hit harder outside the U.S., where governments rely heavily on fuel revenue. In Saudi Arabia, for example, it’s cheaper to extract oil, but the state still needs prices above $90 to keep from running a deficit, according to estimates. (The country’s large financial reserves should help it weather the slump.) Iran’s budget requires an oil price of about $140. And in Russia, where the government budgets for $100 oil, low prices coupled with sanctions could bring down the country’s GDP growth from 2.4% this year to –1%, says Scott Nyquist, a director with McKinsey’s global energy practice.
Countries still developing their production capacity will see fallout too. High-cost extraction operations like oil sands mining in Canada and deep-water projects in Angola and Norway have already seen delays this year and could be in for more, Nyquist says.
But here’s what’s more concerning: Cheaper oil may lead to diminished urgency to develop electric cars, hybrids, biofuels, and natural-gas vehicles. With gas at just $3, the Prius looks a lot less appealing.
This story appears in the November 17, 2014 issue of Coins2Day.