Winners and Losers of the Oil Price Collapse
The international collapse of oil prices has wreaked havoc throughout Canada, Moscow and all points in between. And as prices seem likely to hover around $50 for a barrel of crude—down almost 60% since last June—for the foreseeable future, a clearer picture of the plunge’s victims and beneficiaries begins to emerge.
Uncertain: Superluxe Condos
The stampede of Russian oligarchs into the most rarefied air of skyscraping condos has become tabloid fodder in New York, London and Miami in recent years. And the ruble's big fall late last year—it had declined 40% against the dollar at one point—raised the usual heckles about foreigners stashing money in investment apartments ahead of economic calamity. Now, some brokers are saying that deep-pocketed Russian buyers are walking away from $30M-plus closings...and scrambling for short-term tenants to rent out their empty palaces.
A report this week estimated that oil’s freefall would cost the Canadian government $4.3B in income this year, with the hit to energy-dependent provinces possibly totaling $10B. Such dire assessments led to the Bank of Canada’s surprise move to slash its key interest rate by a quarter point to 0.75% in the face of "unambiguously negative" aftershocks in the Great White North.
(Likely) Winner: Consumers
The oil collapse’s effect on consumers’ spending habits wasn’t immediately apparent over the lukewarm holiday season and December’s “modest” consumer confidence rebound. But its dividends should become apparent over the next few months, particularly in cold weather states with typically eye-popping home heating prices.
Last week, the Energy Information Administration projected that the average American household would save $750 this year on account of lower gas prices, up sharply from December estimates of $550 savings. Snowbound Northeasterners and Midwesterners may double those savings in 2015.
This perception has finally trickled down to Americans, according to Bloomberg, whose Consumer Confidence Index hit a 7.5-year high last week.
Skeptics take heart! Oil’s decline will not make spendthrifts out of all consumers, especially since several sectors most likely to benefit from the price drop in crude will jack up their own prices in response. Hotels and, more frustratingly, airlines have cited supply and demand as reasons why room rates and airfare may actually increase thanks to the surge in customers.
Even a dinner out may not seem like a relative bargain after those gas savings given the uptick in food prices, which the Labor Department says rose 3.2% last year.
Winners: Farmers, Airlines and Truckers
However disparate they may seem, these three industries can bond over huge fuel-related expenses. Fuel comprises up to 30% of a farmer’s production costs and half of an airline’s. Trucking and transportation can also devote 25% of operating costs to fuel. And companies like Celadon, whose income soared 21% in the latest quarter, aren’t complaining about oil’s decline.
Oil drillers should brace themselves for a “devastating” Q2 that will echo loudly in oil-rich regions. To wit, Texas-based analysts have revised predictions of statewide home construction to a 20% decline from initial forecasts of a 12% to 14% improvement. And the Dallas Federal Reserve predicts that overall job growth in the Lone Star State, a perennial labor market success story, will crumble from 3.6% in 2014 to 2% this year.