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February 16, 2016

4 Things to Blame on the Oil Price Crash



The continued fall in oil prices is being felt in several parts of the global economy, with many negative results causing financial turmoil.

Rising Default Rates

Oil companies are declaring bankruptcy and defaulting on their debt at the fastest pace in over a decade, with oil-related bankruptcies in America rising 379% in 2015. Some analysts expect default rates to rise further. Credit rating firm, Moody’s Analytics, has warned that default rates could rise to 4.4% by the end of 2016 — more than double what they were in 2015.

Higher Supplies, Pressured Producers

The Energy Information Administration noted a continued increase in oil stockpiles, causing the agency to lower its price prediction for oil prices in the U.S. The EIA said late last week that it expects WTI prices to be $37.59 per barrel on average in 2016. This is below the previous $38.54 per barrel forecast.

The high supplies are helping Americans see cheaper gas prices, which are expected to be an average $1.98 per gallon in 2016 and $2.21 in 2017. However, the fall in oil may benefit consumers; the fall in prices has again, and pressured many producers. Many smaller producers are now finding it impossible to sell oil at a profit, in turn causing more bankruptcies, firings, and struggling in the energy industry.

Pressured Retirees

With more defaults, lower oil prices, and collapsing profitability in the energy sector, retirees are being hit the hardest both in America and abroad.

Retired investors who rely on dividends to fund their lifestyle after pensions vanished in the 1990s and 2000s are now seeing their income stream decline. According to Markit, oil stock dividends are likely to fall by $12 billion in 2016, although some analysts believe this number is too conservative.

Already ConocoPhillips and Kinder Morgan cut their dividends, but cuts at PetroChina, Noble Energy, Sinopec, British Petrol, and several other energy firms are expected later this year. The decline in dividends in emerging markets is expected to compound pressures that have built up because of falling liquidity in those markets due to a strengthening dollar and declining commodity prices.

Deflationary Import Prices

The fall in oil prices has caused import prices to fall, declining 1.1% month-over-month in January. While this makes products ultimately cheaper for consumers, it isn't stimulating the economy; instead, some economists worry that the fall in oil prices is causing a deflationary spiral in which Americans delay purchases on the expectation of further falling prices.

The cost of energy for Americans has weakened considerably, with energy accounting for less than 4% of Americans’ personal consumption expenditures, according to the Bureau of Economic Analysis.

Consumer sentiment has fallen, declining to 90.7 from 92 prior and far below 92.5 expectations. Consumers grow more pessimistic despite the rising purchasing power falling prices afford them. This indicates the liquidity trap from falling prices is not stimulating demand, and is actually causing greater economic stress.

Courtesy of Economy Watch (Archive Here)

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The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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