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The Pros and Cons of $80 Oil

By    |   Monday, 27 Oct 2014 08:16 AM

At first glance, it always seems like a good thing to have lower oil prices because that leads to lower gasoline prices, which can put more money in our pockets for saving, investing or spending on things we consider more important.

However, there are two sides to the coin when it comes to declining oil prices. There are winners and there are losers, when this happens.

On the winning side, we always think the consumer comes out ahead. And to that, I'd say . . . it depends.

There are a couple of reasons why oil's price drops. It's either due to a lack of demand or a very abundant supply of oil. Right now, there's a lot of oil that's available to the market with the Middle East cranking out production at high levels and with all of the fracking that's going on here in the U.S.

So when the decline in the price of oil is due to there being a whole lot of oil out there available, then it's a good thing for the consumer.

However, if oil is diving due to declining demand for oil and gasoline, then that means the economy is slowing down. And that's not good for consumers. That's what we were experiencing the last time oil declined. And you'll remember that I was saying that declining oil (in that case) wasn't such a good thing because it showed the worsening of the economy, which would lead to layoffs, etc.

And it never matters how cheap gasoline gets if you don't have a job anymore. The lesser evil would be to still have a job and pay a higher price at the pump than to have no job at all.

So, for right now, I believe this is "a win" for the consumer because the dive in oil appears to be mainly from an abundant supply issue going on right now rather than a lack of demand issue.

Now, here's a word of caution. If the price of oil drops much more, it will begin to hurt our oil companies here in the U.S. and it will become a very bad thing.

Yes, a few of our oil fields have break-even prices of $55 to $60 per barrel oil. And a few of our fields need $100 to $120 per barrel oil to break even. But the bulk of our oil fields have an average break-even price of around $75 to $76 per barrel.

So if oil drops to $70 per barrel, you'll see many of our domestic oil companies slow down or halt their drilling operations. Why? They're not in it to lose money. They're not a charity. They're in it to make a profit.

As they idle more rigs, it lessens the supply of oil relative to demand, which eventually makes oil's price stabilize and begin to increase once again. However, if oil's price remained in the $60 to $70 region for too long, oil companies would likely layoff tons of workers and that could begin to affect the economy.

So in order for it to remain a net positive for consumers and our domestic oil drillers, we need oil to spend the majority of its time at $80 or above.

But for now, our oil drillers are in the clear. However, some countries have drillers that need $100+ oil. They are the present losers with oil at $80 per barrel. I've discussed them more in last week's blog.

Some of the current losers are Russia, Venezuela and Iran. Their governments get a lot of their money from the country's oil reserves.

They all really need $100 or more per barrel to make ends meet. So if oil remains anywhere near $80 per barrel, they're going to have to cut some serious governmental spending, and that will slow their economies down and possibly put them into a recession. It would also cause huge layoffs at the oil companies in these countries.

And if enough of these countries slow down due to too low of oil prices, then it will eventually weigh upon the global economy.

The bottom line: Declining oil is only a benefit down to a certain level. After that, it can become just as big of a curse as really high-priced oil. It's a balancing act. The sweet spot for oil is $80 to $100 right now. If we go out of that range, materially, on either side, it's not going to be pretty.

If you'd like to find out how to profit from oil's swings, check out the Ultimate Wealth Report at www.ultimatewealthreport.com.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
Declining oil is only a benefit down to a certain level. After that, it can become just as big of a curse as really high-priced oil. It's a balancing act. The sweet spot for oil is $80 to $100 right now. If we go out of that range, materially, on either side, it's not going to be pretty.
oil, 80, layoff, driller
809
2014-16-27
Monday, 27 Oct 2014 08:16 AM
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