Help me understand something. There should be factual answer, I think.
The price of oil continues to drop, which is obviously a bad thing for energy companies, but it’s a good thing, from a cost of goods perspective, for those companies that use oil-related products, such as airlines. It seems that a lot more companies benefit from cheap oil than those that don’t.
There is clearly a glut of oil on the market these days, especially with Iran coming back online, and there’s the whole global slowdown, I’m looking at you China. As a result we can expect oil prices to remain low for quite some time. In the meantime the stock market is dropping almost as fast as the price of oil. Coincidence?
Some news reports try to l ink the broad drop/correction in the US Stock Market to the dropping price of oil, as opposed to the global economic slowdown, which has little to do with the price of oil.
So are investors that worried about a few energy companies, or is the fear of a global recession really what is driving down the stock market?
That part isn’t correct or at least it may not be. There are many systemic factors working against the stock markets right now and some of the key ones are tied together. The worry isn’t just that the current supply of oil is too high right now; it is that worldwide demand is also dropping because of long-term economic troubles especially in China. Those indicators together point towards a worldwide recession and a reduction in both manufacturing and consumer use of oil products.
Falling oil prices are also causing hundreds of mostly smaller oil companies to file bankruptcy and that produces a direct economic disruption as well.
The stock market does not reflect the state of the economy. It reflects the state of the large, publicly-traded companies that comprise the market.
The side of the economy that benefits from lower oil prices is disperse, full of individuals and small businesses. They may get $1000 worth of savings in 2016, but that is $20/week, not really enough individually to make more than a slight bump. Larger firms, like airlines, do get larger savings, but there’s no guarantee that this alone is going to boost their stock prices, given the huge number of problems the industry faces. Overall, in fact, airline stocks have been down in the past year.
The oil producing side, however, is far more concentrated. They each lose enormous sums, enough to markedly affect their stock prices. This also results in a loss of over 200,000 jobs so far, and these jobs are also concentrated so that the swathe of states that were disproportionately profiting from the boom are now disproportionately affected by the bust.
The global picture is more complicated and can’t be treated in a sentence. China is certainly in the all-fall-down-go-boom stage that most knowledgeable economists have been predicting in more technical language. Even so, a large number of countries have their economies driven by oil and they are all simultaneously hurting. That is going to affect global trade and therefore global stock markets.
Note that oil price changes affect all airlines. And their pricing is constantly changing. Even if jet fuel dropped 90%, everybody would quickly lower their prices in competition and the profit/loss per seat would change very little.
I had a Boeing exec tell me in the mid 90s that all airlines would be profitable (they weren’t at the time, as usual) if they all raised their fares $5. But no one would do that because that airline would lose customers and the others gain. So the strategy is to try to lose money the slowest and hope the others “go away”.
There is some effect because lower fuel means cheaper seats means more people flying, but other factors sometimes swamp that (like a shaky economy discourages people from taking vacations, etc.).
One way fuel prices affect airlines is during times of rapid change (up or down) and some do a better job of timing contracts than others. That’s sometimes a make or break period for an airline on the edge of bankruptcy.
The rapid collapse of oil prices introduces uncertainty, which is pretty much the worst thing investors can imagine. For example, a lot of investors are worried about ‘contagion’, ie, that decreasing oil prices will take down non-oil businesses. If a North Dakota-based fracker has borrowed a bunch of money to drill wells, and now can’t pay back the loan because their oil isn’t worth that much, sucks for that fracker, but also sucks for that fracker’s lender. If that lender suddenly has a lot of non-performing loans, he may go under too. He may have been the counter-party for other financial transactions, which are no longer backed, creating a domino effect.
Layer a bunch of derivative financial instruments on top of this, and you have something that seems eerily like the 2008 crash, except with oil prices, rather than house prices, being the underlying fundamental shift.
Is this likely to happen? Probably not. But the possibility - the fact that something has changed and no one is certain what may result - is driving some of the panic selling.
It would actually be a great buying opportunity for more cool-headed investors, except the market was already likely overpriced at the end of 2015, and this correction so far is really only making things slightly less overpriced.
In part, the drop in oil and the drop in stocks are symptomatic of the same thing: the fear of a global economic slowdown. less commerce, less manufacturing, less energy use, bad Economies,low stocks.
Low oil prices are bad news for producers of oil, and really bad news for startups, explorers and high cost producers like the ones that extract from shale. Energy is about 6.5% of the SP 500, so bad news from those and related companies has a negative effect on stocks in general.
It’s also bad news for everybody else out there that has oil. If you are a big consumer of oil you probable bought the oil you were planning to use for the near future at higher prices. You are going to have to sell your products and services at the current prices, so you may end up taking a bath if you were not hedged.
Ultimately though, long term low energy prices are a good thing from an economic perspective. Of course, that may or may not be happening.
At least we know that the baggage fees will disappear soon. I mean they were only added to account for the increase in fuel so they will clearly disappear now.
No, it’s not a coincidence, though of course there are a lot of factors as to why the price of oil is dropping, as there are to why the stock market is tanking. China is, of course, a large factor in both of these. Europe is also though. And we are in a feed back loop of fear atm, with the price of oil dropping and spooking the entire market when coupled with all these other things happening. It looks to be a grim year, even while we all enjoy the fact that the price of gas has gone down (I bought gas today for less than $1.50 a gallon which is the first time I’ve seen it this low in a long time).
I started a thread around the time the Feds raised interest rates and basically got crapped on by some dopers.
Comments about how the feds don’t decide crude prices and other obvious statement, however now maybe those who commented are now seeing the relation.
However slight that rate increase can tank the markets just as we are seeing in such a fragile economy. The next ease may not be called a QE4 but I would expect the interest rates to return to zero.
I also expect to hear how low the jobless rate is and how many jobs are being created blah blah blah.
Oh, for Pete’s sake. Oil prices started dropping more than a year ago. And the market has been flat or slightly down the entire time. Take your crude conspiracy theory (in all senses) somewhere else.
Baggage fees are tax arbitrage. Money from airline tickets is taxed at 7.5% while ancillary fees are not. Thus airlines can save money by reducing the ticket price by a certain amount and then charging the same amount in baggage fees.
Nothing actually to do with the price of gas.
I don’t actually think there is any relationship between fuel cost and baggage fees. But that was portrayed as one of the reasons for the baggage fees by the airlines.
From the USAToday: “One more thing. Baggage fees were also justified as a way to offset the rising cost of jet fuel. Does anyone think those fees are going away now that jet fuel has fallen a breathtaking 50% since the beginning of 2014?”
Why would China’s slowing growth result in less barrels of oil consumed?
China’s growth slowed from 15-20% to 5-6%. That means it is still growing at a rate of 5-6%, which in your simplistic terms, about 5-6% more oil consumed this year than last year.