There appears to be a quietly gleeful atmosphere about the distress that Russia and Putin are embr(oil)ed in. Perhaps we should take a closer look at the potential US fallout from the crisis. The obvious conclusion is that US interest rates will not rise any time soon. Some facts about the US economy and the crash in the price of oil.
Earlier this year, The Manhattan Institute published the following findings:
1. In recent years, America’s oil & gas boom has added $300–$400 billion annually to the economy – without this contribution, GDP growth would have been negative and the nation would have continued to be in recession.
2. America’s hydrocarbon revolution and its associated job creation are almost entirely the result of drilling & production by more than 20,000 small and midsize businesses, not a handful of “Big Oil” companies. In fact, the typical firm in the oil & gas industry employs fewer than 15 people.
3. The shale oil & gas revolution has been the nation’s biggest single creator of solid, middle-class jobs – throughout the economy, from construction to services to information technology.
4. Overall, nearly 1 million Americans work directly in the oil & gas industry, and a total of 10 million jobs are associated with that industry. Three times that many Americans are indirectly connected to the industry.
The important takeaway is that, without new energy production, post-recession US growth would have looked more like Europe’s – tepid, to say the least. Job growth would have barely budged over the last five years.
John Mauldin: Texas has been home to 40% of all new jobs created since June 2009. In 2013, the city of Houston had more housing starts than all of California. Much, though not all, of that growth is due directly to oil. Estimates are that 35–40% of total capital expenditure growth is related to energy.
It is no wonder that so many people feel like they are still in a recession; for where they live, it still is. Houston, we have a problem. With a third of S&P 500 capital expenditure due from the imploding energy sector (and with over 20% of the high-yield market dominated by these names), and when Reuters reports a drop of almost 40 percent in new well permits issued across the United States in November, its time for a reality check.
The reality is that the recent energy boom was financed by $500 billion of credit extended to mostly “subprime” oil companies, who issued what are politely termed high-yield bonds – to the point that 20% of the high-yield market is now energy-production-related. The holders of these high yield Junk bonds need to be very nervous, to say the least. The high-yield shake-out, by the way, is going to make it far more difficult to raise money for energy production in the future, when the price of oil will inevitably rise again. The Saudis know exactly what they’re doing. (Thank you John Mauldin.)
About a third of US oil production is via shale oil. Goldman Sacks published their breakeven prices for shale oil to be profitable as $70-$80 a barrel. One does not have to be a rocket scientist to work out the consequences if oil stays low.
In conclusion, The US CPI (inflation) rate for November published today was a negative 0.3% compliments of falling energy prices. The possibility of the fed raising interest rates at this point in time, and while this situation continues, is a pipe dream. We will witness huge attempts to reflate and cheaper and diverging currencies. The danger from this is the possibility of diverging policies between central banks, whom up to now have worked in unison. And finally, if one is looking for "too big too fail", Russia is the perfect example. I would not be too surprised to see those same Western Governments who placed sanctions on Russia, rushing to save the Bear. My advice to the hotshot politicians...Don't poke the Bear!
"It's one thing to shoot yourself in the foot. Just don't reload the gun." - Lindsey Graham
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