This I know for sure: oil prices are dropping rapidly, likely due to a glut of supply, and now the world’s two benchmarks for crude prices, West Texas and Brent Crude, have each hit five-year lows. West Texas dropped below $60 a barrel on Friday for the first time since the recession (and hey, I can fill my tank up with $30 for the first time since I was a teenager).
But where prices go from here, and what that means for investors, is an entirely different question.
I work part of the energy beat for our recently launched Real Assets Adviser, and while at times it feels like I’ve got a hold on the industry, other times it feels like trying to read Chinese in the dark.
Oil prices dropping is “interesting,” yes, but what does it mean? It means oil-producing countries are going to take a $316 trillion annual hit, if you ask Moises Naim of the Carnegie Endowment for International Peace, but it could also lead to a shot in the arm for global GDP as $1.3 trillion is shifted from producers to consumers according to The Economist.
Does it mean MLPs will struggle? Well they have suffered a little of late, but I’ve seen convincing arguments that their success isn’t really tied to oil prices historically. Does it mean that OPEC will struggle? Well, maybe, but Saudi Arabia is just using it as an opportunity to strangle small competitors.
Does it mean we will see more mergers? Well, Halliburton was just in a big merger, though it isn’t clear if it had to do with falling oil prices or not. Does it mean an end to the shale revolution? Well, probably not, but that’s just an unsubstantiated opinion.
Does it mean that alternatives will struggle? Well solar did, but that was an irrational market reaction as solar fundamentals are much more tied to government policies and the price of natural gas than crude oil prices, according to MarketWatch, as alternatives don’t directly compete with oil at the pump.
The price drop may open the way for new gas taxes, such as the cap-and-trade in California that begins Jan. 1, which will likely be easier for the public to swallow with prices so low and will only increase gas prices by about 10 percent, according to Severin Borenstein, an energy economist at University of California, Berkeley, during an interview with KQED. But, despite low prices, there is still very little political will to raise gas taxes, Borenstein added in the same interview.
So falling gas prices are “interesting,” yes, but what does it actually mean?
Will prices continue to fall (as low as $43 a barrel in 2015, worst case scenario, according to Morgan Stanley) or bounce back? The oil futures marker is $10 to $20 per barrel higher than spot prices right now, indicating a future price raise in the cards, but that is still just a guess.
When a benchmark MLP index, the Alerian, has returned 23.6 percent annually over the past five years (with a 5.2 percent dividend yield, too), it seems like you just have to close your eyes and hold your wallet out to make money in the energy world. But isn’t that how it always seems right before the bubble pops? I mean, not that there is going to be an oil bubble, right?
Hey, what do I know? I’m only 25. I wasn’t even born yet the first time some of you lost money.
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Reg Clodfelter is a reporter with Institutional Real Estate, Inc.
