Tyler Durden: The plunge in oil prices is unambiguously good for the US economy.
– Virtually every “pundit” with a business suit, who collected a $200 CNBC appearance in the past 3 months
A week ago we showed that, using Gallup polling data, the crude crush has clearly led to a “spending surge” among US consumers: whereas a year ago all US consumers spent $96 per day, this December, with crude and gasoline prices roughly half off, Americans spent a self-reported whopping, drumroll, $98 per day.
Worse, as is well-known the biggest marginal beneficiary of low gas prices are not wealthy US consumers, for whom the elasticity of gasoline (and crude) prices is irrelevant, but poorer households, those making under $90,000 a year. It is here that the spending spree was an even more unprecedented $1 more, from $84 a year ago to $85.
That’s the good news.
The bad news is that contrary to conventional wisdom, as even Bank of America and Goldman now admit, sliding crude prices will have an increasingly more negative impact only not on economic growth but S&P earnings… something we said from day one.
Here is Bank of America becoming increasingly less cheery:
Despite conventional wisdom, investors seem to be on edge, with the 10-year yield below 2% and equities stumbling. Global disinflationary fears are growing, with concerns that the US will not be able to decouple from weakness abroad. And despite the benefits of cheaper gasoline, reports of a recent shale default and cuts to energy capex are putting the focus on downside risks. In our view, those risks are contained.
In our Year Ahead piece, we highlighted the downside risks to the energy patch from falling oil prices. At that time, based on our 2015 oil forecast of $90/bbl, we saw around 0.1%-pts of risk to GDP. But continued declines in the oil price suggest mounting risks. Here, we gauge the downside risk to growth if oil stays at $50/bbl. Already, rig counts have fallen to 1482 in the first week of January from a high of 1609 in October last year (Chart 1), suggesting declines in exploration/drilling outlays.
Although that 8% drop appears modest relative to history (we saw a 60% decline in the 2009 recession), Chart 1 shows that there’s about a four-month lag in the response of rig counts to weaker oil prices, so there’s likely more pain to come. Indeed, our Oil Services team sees a near 15% decline in rig counts in 2015. It’s important to note that the relationship between oil production and rig counts is non-linear. As our Commodity Strategy team points out, early reductions in rigs don’t necessarily imply falling output as operators may initially shift resources to more economic wells, keeping production intact. As prices fall further, the decline in rigs may eventually trigger greater curtailments in production. Thus, we see a notable lag of several months in the response of production to weaker prices.
The good news is that oil and gas extraction accounts for only 1.8% of GDP directly, suggesting a small hit to the overall economy. For example, if energy production were to fall by 10% in 2015(just shy of the 14% decline in the recession) the decline in production would slice 0.2% off of GDP.
Needless to say, oil is not only 10% lower than the $50/bbl price when this note went to print on Friday, but is about 50% below BofA’s 2015 oil forecast. So… what were we talking about again?