Morning Market Thoughts
Good morning. We are looking at a weak open this morning. Oil prices have traded lower, which makes investors want to run for the hills these days. Let’s explore:The unwashed masses like you and me like low oil prices because we pay less at the pump, and the products we buy are cheaper because it costs less to make them. But, as the saying goes…it’s not all about you. When oil prices fall tooo low, drills shut down because it’s not economical to continue producing something that costs more to produce it than you can sell it for. That’s known as bad business.
When prices are at current levels, jobs are lost lost as oil extraction and production activity wanes. While the figures vary depending on which source you use, it is estimated that there are 2,000,000 direct jobs directly tied to the oil industry, though I’ve seen estimates that are a lot lower. The BLS estimates that approximately 40,000 employees are directly tied to oil and gas extraction — the estimates are limited to geoscientists, engineers, petroleum pump system and re finery operaters and gaugers, roustabouts, and wellhead pumpers.
Honestly, I thought the numbers would be much higher. Note that the lower estimate doesn’t include the guy at the gas station who sells you your Big Bulp filled with chemical-laden Diet Pepsi and the lottery tickets; nor does the estimate include the big wigs who sit in the corporate office collecting their executive paychecks. Drivers still fill up — they just pay less.
So as I look at the low price of oil, I really don’t find the “loss of jobs” in the oil industry argument very compelling (though I’m certainly sensitive to those who have actually lost jobs due to low oil prices).
I think you’ve got to expand your view and consider the loss of jobs in the oil transportation industry that are directly tied to the lower production volume at the source. Railroad companies make a lot of their revenue from transporting oil (and coal, which has slowed to a trickle). (By the way, there is a reason why that benevolent, likeable and kind man known as Warren Buffet was such an environmentalist who was vociferously against the Keystone Pipeline. He owns Burlington Northern (BNI), a large railroad company that transports oil. He likes a long string of oil laden cars behind each engine — the longer the better.
When less oil is produced, the car count drops; profit drops; and jobs start going away.
So you can see that there is a ripple effect from lower oil prices, the most obvious of which is a massive decline in profits by oil and gas companies. And that is the real culprit — loss of profits. the energy sector makes up about 6% of our GDP, which is significant. So when energy companies suffer, the GDP numbers decline, and when GDP numbers decline, investors get nervous and fear an economic downturn. So this is a bit of a vicious cycle.
And that’s why falling oil prices have a widespread impact on stock prices — no sector trades in a vacuum.
Please try to avoid being too enthusiastic about buying stocks right now. If you look at a chart that covers more than a year, you’ll see the patterns of where the best entry points were. You’ll also see the points that mark where the best times to take profits were. Simply put, this is not the best entry point.
If you haven’t viewed last night’s Strategy Session, you might want to take some time to view it this morning.
See you in the Forum.
Dan
When less oil is produced,
Market Update