Decreasing Oil Prices Threaten U.S. Economy
Isn’t it wonderful to pay so little as you fill up your tank at a gas station?It has been a while since going through your utility bill would make your blood boil, hasn’t it? Well, while you may benefit from cheap oil, many others in the U.S. aren’t happy with that.
The economy in states that produce oil such as North Dakota, Texas, Oklahoma, New Mexico, Wyoming and Alaska have been hit by the plummeting crude price. Bill Walker, Alaska’s Governor, has recently recommended a state income tax (they didn’t have one in 35 years) as a way of compensating from the drop in tax revenue related to oil. Since November 2015, Texas’ gas and oil production tax revenue plunged respectively 51 and 47 percent. In North Dakota, oil-related tax revenue fell by 43 percent last year.
By the mid 1980s, es the world experienced yet another oil glut, regions that pumped oil struggled with a recession, even though other states did well. According to James Hamilton, an economics professor at San Diego’s University of California, believes something like that is about to happen once again.
Oil companies and their workers have been affected, too – a total of approximately 17,000 were laid off in gas and oil companies in the U.S. last year. The number increases to approximately 87,000 if you count oilfield support jobs. Since the start of the last year, 42 oil companies in North American filed for bankruptcy protection – that pain is only expected to continue.
Fadel Gheit, An Analyst in Oppenheimer & Co, has told CBS news that up to half of U.S. independent drilling companies could go bankrupt before the prices bounce back. Global head of energy analysis and co-founder of the Oil Price Information Service Tom Kloza believes we should expect even more layoffs in the next few weeks, as conference calls and earnings come up.
Hamilton reminds that not only employees of gas and oil companies are getting hit. He includes individuals such as ranchers who lease their property to gas and oil companies, restaurant and grocery stores that sell to those who work on oil patches, realtors that are having trouble selling property in former boomtowns, and more.
Other industries are taking heat as well. Kloza utilizes financial companies and banks as an example. Such companies, for instance, issue credit cards that the population uses to purchase gas. They take a transaction fee of 3 percent – but last year, they did not collect as much due to the fact consumers spend $120 billion less than usual at the pump. They had over $3 billion less in fees, a significant blow even for a bank.
Another risk that oil companies face is the defaulting on their loans for very expensive drilling projects. Banks have been marking down the value of these loans, and upping the loan loss reserves. The Bank Of America, for instance, has approximately $21 billion in outstanding gas and oil companies loan, and have added $264 million to their loan loss reserves. Wells Fargo, with approximately $17 billion in loans to such companies, has increased their loan loss allowance by approximately $1.2 billion. Citigruoup built up their reserve for oil dept by $300 million – the Standard and Poor’s Rating Service gave a warning in December that about half all energy junk bonds were at risk of default.
Fortunately, gas and oil exposure does not make up a large part of big bank loans, and the strict regulations set after 2008’s financial collapse could help protecting the capital. According to Hamilton, the situation is not large enough to cause financial problems such as the one experienced in 2008.
Another victim of the lower oil prices was the housing market – In North Dakota, Texas and Oklahoma, foreclosures jumped as job cuts among workers grew rapidly. Real estate information company RealtyTrac found an 15.7 percent increase in foreclosures in Texas, a 36 percent increase in Oklahoma, and a 387 percent increase in North Dakota – even though it still has the lowest rate due to its small population. Foreclosure filings in a national level, however, are at a nine-year low. However, this appears not to be a problem in a larger scale – in fact, it may even be beneficial: To Hamilton, the benefits of cheap oil outweigh the negatives for the U.S. in general, due to the fact that the country is a net oil importer. The money saved from their cheap gas adds up to more than producers lose – even though that may not be too comforting for those in the oil-producing states.