Anyone in America who drives a car is probably happy to see crashing oil prices translate to falling gasoline prices.
WTI crude oil has gone from above $US100/barrel this summer all the way down to around $US76/barrel this week.
While the economy is likely to benefit from improved consumer sentiment, low oil prices also come with negative effects. Specifically, if prices get too low, then energy companies won’t be able to cover the cost of production in the US. This spending by energy companies, also known as capital expenditures, is responsible for a lot of jobs.
“The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending,” Goldman Sachs’ Amanda Sneider writes.
Wall Street’s economists and stock market strategists have argued that the next leg of the recovery and bull market would be fuelled by a boom in capex across US businesses. So a slowdown in energy industry spending could mean trouble.
“Our commodity strategists estimate that US oil production growth slows at a WTI price of $US75/bbl, which they forecast will be reached in 1Q 2015. Even before then, the nearly 30% decline in crude oil prices since June has likely caused many firms to rethink planned capex.”
Goldman, however, is optimistic that we won’t experience a worst-case scenario.
“A slowdown in Energy sector investment will weigh on aggregate S&P 500 capex spending in 2015, although growth for the sector, and accordingly for the broad S&P 500, should reaccelerate as oil prices rebound in 2H 2015.”
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