A PERSPECTIVE ON RECENT EVENTS — DECEMBER 2014
You Got a Raise
“They [lower oil prices] are like a tax cut to the economy.”
—Jack Lew, U.S. Secretary of the Treasury
Summary
• The declining price of oil is positive for the global economy in the near term
but isn’t equally so for all economies and participants.
• Energy exploration, drilling and production, particularly in the U.S., are
expected to slow as investors and businesses adjust to lower prices.
• All else being equal, lower oil prices should continue to support equity
markets in the near term and help drive a global rebalancing in coming
years.
JASON D. PRIDE, CFA
Director of Investment Strategy
CASEY C. CLARK, CFA
Research Associate
Lower Oil Prices Lift Disposable Income
Due to lower energy prices, consumers are finding more discretionary money
this December. Led by the U.S., the global energy boom has surprised many
forecasters with its magnitude and longevity. As of December 1, the price of
crude oil dropped 40 percent to its lowest level in more than five years. Felt
throughout the food chain, U.S. gas has averaged $2.78 per gallon, the lowest
level since 20101, while heating oil expenses are expected to fall 27 percent this
winter relative to last year. The impacts of supply and demand are at play, too—
while the population has grown 11.3 percent, oil demand has only increased 9.3
percent2.
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EXHIBIT 1: Price of Crude Oil
U.S. Energy Information Administration. “Short-Term Energy Outlook.” Dec 2014. http://www.eia.gov/forecasts/steo/
World Economic Forum, “What’s the Future for OPEC?” Dec 2014. https://forumblog.org/2014/12/whats-the-future-for-opec/?utm_
content=buffer56d40&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
A Net Positive, But Not Everyone Is a Winner
Comprising more than five percent of household spending, the reduced price of gas could
amount to as much as a two percent raise for the average consumer. Lower-income
consumers, who typically spend as much as 20 percent of their income on energy, will likely
benefit materially more than those in higher income brackets.
Similarly, not all countries will benefit equally from the decline in oil prices. The chart below
displays the gain or loss in economic output (GDP) by country from lower oil prices. Over the
near term, oil-importing countries like the U.S. will benefit, whereas Saudi Arabia stands to
lose $117 billion in revenues if oil prices remain depressed for another six to eight months3.
EXHIBIT 2: Oil’s Fall: Winners & Losers
Is This Time Different?
While we agree that lower oil prices are positive for the U.S. economy, we must also
consider the reality that the U.S. has recently transformed into a much larger producer of
oil. A meaningful portion of our post-recession recovery is attributable to the growth of the
energy sector, as the shale boom has directly created a more prosperous and diversified
U.S. economy (we will save the topic of environmental effects for another day).
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EXHIBIT 3: Domestic Oil Production vs. Imports (12-Month Average)
Talley, Ian. “Oil Price Winners and Losers Around the Globe.” Wall Street Journal. Dec 2014. http://www.wsj.com/articles/BL-REB-29524
Market Insights
Page 2
You Got a Raise
A recent Economist article asked, “Will falling oil prices curb America’s shale boom?” The
author suggested that if prices fall below the $65 to $70 per barrel level, the U.S. could see
investment in the industry fall by 20 percent and production growth slow to 10 percent per
year4. Interestingly, many forecasters predict oil prices will stay below $100 per barrel for an
extended time due to excess supply.
Does This Affect Our Strategy?
On the whole, we believe lower oil prices will benefit the global economy and markets but will
have a muted impact in the U.S. Lower energy prices should certainly help Europe and Asia,
providing yet another driver toward a more balanced global economy and marketplace.
On the other hand, lower oil prices should make a dent in headline inflation and provide an
excuse for the Federal Reserve to delay or slow its rate-hike plans. There are many factors at
work regarding interest rates, and while a lower energy price contributes, it is not a primary
driver.
Finally, we recognize that energy-related companies have been pummeled by the decline
in oil. The XLE energy ETF is down 25 percent, and few, if any, equities in the sector have
been spared. At some point this will provide investors with a buying opportunity. Our
valuation measures for such companies already look more attractive. Often, however,
such sector-specific declines do not disappear overnight, as investors require time to adjust
their expectations for the newer reality. As such, we will continue to cautiously monitor for
opportunistic entry points.
Oklahoma, Lindsay, “In a bind.” The Economist. December 2014.
http://www.economist.com/news/finance-and-economics/21635505-will-falling-oil-prices-curb-americas-shale-boom-bind
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Market Insights is intended to be an unconstrained review of matters of possible interest to Glenmede Trust Company clients
and friends and is not intended as personalized investment advice. Advice is provided in light of a client’s applicable
circumstances and may differ substantially from this presentation. Opinions or projections herein are based on information
available at the time of publication and may change thereafter. Information gathered from other sources is assumed to
be reliable, but accuracy is not guaranteed. Outcomes (including performance) may differ materially from expectations
herein due to various risks and uncertainties. Clients are encouraged to discuss the applicability of any matter discussed
herein with their Glenmede representative.
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