Energy Uncertainty Sparks New Year's Dow Plunge

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Energy Uncertainty Sparks New Year's Dow Plunge
| published January 6, 2015 |

By Thursday Review staff


Oil prices continue to drop worldwide, and that—coupled with a striking drop of the cost of gas at the pump for Americans—should bring all good news.

But, as is the case with anything economic, there is a downside. On Monday, January 5, 2015, the first full trading day of the New Year, the Dow plunged 312 points—a massive selloff in direct response, analysts say, to lower energy prices across the board.

Crude oil prices are now lower than they have been since 2009, and energy analysts think that the price may dip still further, reaching prices not seen since 2007 or 2008. The slide could continue until early spring. This has been a windfall for homeowners and drivers in the United States, many of whom are now seeing gas prices as low as $2.00 per gallon. Several Federal and independent estimates say that it prices continue to stay low through early summer, the typical U.S. household could see a savings of more than $1100 (more, if those prices keep falling).

But the downside to all that good news: traders and investors are unsure of where to shift their money. Many investors, once deeply committed to the energy sector, are dumping oil and energy-related stocks, and that oil and gas selloff has been at the heart of the Dow’s sudden decline. The selloff of energy-related stocks has been the result of individual traders, as well as institutional investors. Wall Street analysts say that the selloff has nothing to do with panic or fear, but everything to do with uncertainty about where to invest that share of investment cash.

Most economists suggest that 2015 might be the year in which the U.S. economy—and those of many of its trading partners in the EU and elsewhere—shed the last vestiges of the Great Recession. Recent polls tell us that U.S. consumers are more optimistic than ever: U.S. companies are hiring again, home and auto sales have increased, and despite a broad increase in food prices spurred by last year’s severe winter and a drought in California, inflation has remained in check. Experts say that the big selloff means that traders are merely unclear about where to shift investments, especially as it relates to energy.

“Even those investors committed to energy as a long-term value find it difficult to pick which horse will win,” one investor told Thursday Review in an email. “Energy’s been reliable for decades, even in the big market downturns, and there are plenty of people out there that think energy is still the place to bet. But, there isn’t any consensus on where to place your chips. It’s all a gamble.”

According to the website Auto Blog, combustion engine cars may soon represent the minority of vehicles on the road. Alternative fuel vehicles, alt energy source cars, and a variety of efficient hybrids are beginning to see a dramatic penetration into most markets—even in the United States, which has been traditionally reluctant to cut itself free of gasoline-powered cars. Dozens of new hybrid cars have hit the U.S. markets in the last 18 months, and the sale of electric and battery-powered vehicles is also on the rise. The website reports other energy analysts think that traditional internal combustion engines will be overtaken by hybrids and alternative powered cars within about three years.

Even as risk-averse energy investors are unclear about specifically where to invest, the future looks bright for all those alternatives. Automakers like Tesla expect to be seeing a robust increase in the sale of its battery-powered vehicles, and the California car maker is already in the early stages of building a massive factory—in partnership with Panasonic—to build lightweight, high tech batteries for cars and trucks. Elio Motors, based in Phoenix, Arizona, hopes to be producing and selling it hyper-efficient three-wheeled car by the thousands within the next year. The little Elio can get up to 84 miles to the gallon on the highway, and up to 49 in the city. And unlike the Tesla, which is still pricey for a sedan, the Elio sells for as little as $6,999.

Many analysts say that Tesla is poised for a bigger takeoff once it completes the next phase of construction of its charging stations in North America. Currently, Tesla operates about 115 charging stations, but plans to open as many as 100 more within the next year to 15 months. Tesla also plans to move vigorously this year to ensure that it meets its goal of making its charging facilities available to about 95% of the U.S. highway footprint.

Another factor in the oil price drop-off: a huge surge in supply for North Americans as a direct result of alternative forms of energy extraction, most notably oil shale—obtained through a process called fracking (high pressure water is used to fracture rock and stone, under which fossil fuels are trapped). Worldwide, the glut of oil continues. Saudi Arabia, the world’s largest oil producer, is flooding the market with its crude oil, some business analysts believe as a direct attempt to undercut new American supplies. In addition, OPEC is divided about how to react to the rising reserves being created by falling demand and overproduction. In November, OPEC held an emergency meeting to confront the problem, which is driving the economies of Venezuela and Iran into deeper recession and even shortages.

Russia (not a member of OPEC), a nation which pins much of its market stability and growth on oil, and already suffering under the weight of U.S. and EU sanctions, has seen its economy fall into recession as demand for oil has fallen—especially among European Union nations. The Russian ruble has seen its value cut in half just within the last one year. (The oil price drop-off has also had the unintended but useful effect of depriving ISIS of badly needed cash; ISIS controls numerous oil fields and distribution facilities in Syria and Iraq, and—after selling the oil on the black market—it was using that cash to fund its military operations).

The oil recession is also expected to have an adverse effect on the economies of energy towns like Houston and Dallas, where layoffs are expected throughout 2015.  More layoffs, perhaps into the thousands, could hit numerous energy companies if the price per barrel continues to drop, as U.S. companies find it difficult to extract oil and gas at prices as low as what the Saudis are willing to endure.  Others point out that the shifting politics of Washington is prompting Saudi Arabia to act aggressively: the incoming Republican majority in the House and Senate will very likely introduce a repackaged bill authorizing completion of the Keystone Pipeline.  Though the President has promised to veto any further pipeline legislation, some energy analysts believe that Saudi Arabia is taking no chances: by flooding the U.S. markets with inexpensive oil, it may assure itself some degree of supply-and-demand stability, and low prices at the pump will undercut political pressure to build more pipelines.

But in the meantime, most Americans find little reason to complain. Gas prices in some states have fallen below $2 per gallon, and some Thursday Review readers in places like South Carolina and Oklahoma have sent photos showing signage boasting prices of $1.93 and $1.85. The net result of those savings could be a surge of retail activity, and a rise in demand for many items which U.S. consumers have deferred or delayed purchasing for years: electronics, computers, appliances.

In short, one investor’s good news is bad news for the next. Still, Wall Street experts say that the New Year’s plunge is not a reason for concern—once those investors find another place to put that cash, the Dow will continue to see a good year.

Related Thursday Review articles:

U.S. Consumer Confidence Rising; Thursday Review staff; Thursday Review; December 30, 2014.

Oil Prices Drop, But Food & Coffee Will Cost More in 2015; Thursday Review; December 28, 2014.

Oil Prices May Continue to Drop; Thursday Review staff; Thursday Review; December 23, 2014.