Crashing oil prices are bad news for energy-driven economies like Saudi Arabia, Russia and Nigeria, which rely on revenues to fund government spending.
In recent years, all anyone’s ever talked about in the US is the shale boom, sparked by developments in hydraulic fracturing technology. The boom has been an important source of new jobs and business spending for the economy. And investors in the industry have certainly made a lot of money.
With low oil prices making a lot of these shale drilling projects unprofitable, investors have been left wondering just how exposed the US economy and its financial markets really are.
While the US energy industry is indeed big, it’s actually relatively small compared to all of the other huge industries that make up the US economy and markets.
Goldman Sachs’ Alec Phillips and Kris Dawsey offer some context in a note circulated to clients late Friday. They emphasised that energy is more broadly represented in the public financial markets than in the economy as a whole. Here are some stats about the US energy industry:
- 3% of GDP.
- 1.7% of employment.
- 7% of S&P 500 market capitalisation.
- 10% of investment grade credit.
- 16% of high-yield credit.
Indeed, investors in energy junk bonds and junk bond indexes have felt a lot of pain. But those with broadly diversified portfolios are really feeling much of a pinch.
Energy has been an increasingly important component of the US investment spending, or capital expenditure (capex) story. While that theme certainly has its cracks, economists agree that the benefits of cheap energy to the consumer overwhelmingly offsets this downside.
“Consumer spending represents 68% of the US economy,” Charles Schwab’s Liz Ann Sonders said earlier this month. “Oil and gas capex represents about 1% of US GDP and less than 9% of US total capex (which in turn represents about 12% of US GDP). Therefore, the benefit of lower energy prices to the consumer and many businesses greatly outweighs the significant hit to energy companies and/or energy-oriented capex, especially in energy-oriented states.”
“The upshot is that oil producers are over-represented in publicly traded markets, and oil consumers are under-represented,” Phillips and Dawsey write.
Phillips and Dawsey estimate current oil prices will offer a net boost of 0.4 to 0.5 per cent points of growth to 2015 GDP.