Tags: Oil Price | Crude | Economy | Spending

Debate Rages Over Impact of Oil Price Plunge on Economy

By    |   Sunday, 01 February 2015 07:26 PM

Experts have mixed views as to whether the plunge of oil prices to 5 ½-year lows is good or bad for the economy.

U.S. crude prices have dropped 54 percent since late June, trading at $48.99 a barrel Friday.

Star CNBC commentator Larry Kudlow sees nothing but good coming for the economy from the price slide. "This is a gigantic tax cut for the American economy," he told "The Steve Malzberg Show" on Newsmax TV.

"It's not a marginal tax rate reduction, I'm just saying it has the same impact. People will have much more disposable income to spend on other goods and services, and the middle class needs that because they've not had big wage gains."

The oil price drop will be a boon for corporate America too, said the host of "The Larry Kudlow (radio) Show."

"Businesses need this," he argued. "Manufacturing companies and retailers and everybody else, they all have fuel costs, they all have heating costs."

Meanwhile, a survey of 306 investment professionals by the ConvergEx Group shows that 68 percent of the respondents think oil prices will keep falling, while only 20 percent responded that they felt oil prices had made their lows.

And an identical percentage believes that if oil slides to below $30 a barrel, a global recession is inevitable.

"The idea behind this question was simple: at some point oil prices aren't just a nice theoretical tailwind for global economies," Nicholas Colas, chief market strategist at ConvergEx, wrote in a commentary.

"Rather, they become a signal that worldwide demand is contracting so quickly that oil prices must quickly decline to reflect that fact."

To be sure, 66 percent of respondents think that oil prices at current levels are positive for the U.S. economy, while only 22 percent think they're negative.

Activist investor Carl Icahn agrees with those looking for lower prices. "I think they will continue to go down unless there is some outside event," he told CNBC.

But looking forward, when oil rebounds there will be "tremendous opportunity" for investors, Icahn said. "There will be increased demand for oil over the years," he said.

With sources of supply diminishing, offshore producers will thrive, Icahn said.

To be sure, "I wouldn't rush in now on oil, and that's talking against myself because I own a lot of oil stocks," he said.

Fortune magazine contributor Cyrus Sanati says the oil industry has a lot of work to do before those stocks become attractive.

"Energy companies will need to do more than just cut costs and renegotiate service contracts to remain afloat at $40 a barrel oil — they need to quit being so darn sloppy," he writes.

"A decade of strong oil prices made Big Oil rich and fat, which has led to waste across the industry."

Legendary short seller James Chanos, founder of Kynikos Associates, has shorted oil majors for a couple years and remains bearish on them.

'The fracking and shale revolution was propelling us [the United States] to be the largest oil producer in a way that I thought was uneconomic and still is uneconomic for the drillers," he said. "But it was going to be enough supply to really disrupt the markets."

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Experts have mixed views as to whether the plunge of oil prices to 5 ½-year lows is good or bad for the economy.
Oil Price, Crude, Economy, Spending
Sunday, 01 February 2015 07:26 PM
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