What are your views that crash in oil prices will hurt the U.S economy from Texas to wall street?

Traditionally, low oil prices have been a boost to economic growth in the U.S. The

crash in oil prices over the past two years, however, has produced a decidedly mixed

picture - with potentially worrying implications for the economy as a whole.

When oil prices fall, consumers spend less on gasoline and have more disposable

income to spend on other goods, which contributes to economic growth. Conversely,

as oil prices have gone up, consumers have less disposable income to spend on

other things, such as new cars, going out to eat, entertainment and new clothes.

Consider the average family who logs 15,000 miles a year and owns a vehicle that

gets 20-25 miles per gallon. If prices at the pump are US$3.80 per gallon, this family

would need to spend $2,280 to $2,850 per year, but if gasoline prices fall to $1.80

per gallon, then this same family would spend less than half that, saving $1,200 to

$1,500 per year. This is a significant increase in disposable income, given that per

capita household income in the United States is around $55,000 per year!

This savings from lower oil prices is compounded by lower prices in other goods

such as milk, beer, electronics and clothing, which all cost less to produce and

transport with lower energy and fuel prices.

But things are different this time. The U.S. is now the largest producer of oil in the

world, which means domestic oil and gas companies - and the states they operate in

- are hurt by low prices.

What is less appreciated is that continued cheap oil has the potential to wreak havoc

in the financial markets. When times were better, oil companies took out bank loans

and hedging contracts against big swings in oil prices, which will come due in the

months and years ahead. Bad outcomes from these past financial bets could have a

ripple effect far beyond oil and gas.

Oil and gas now a bigger part of our economy

The notion that cheap oil helps the economy is based on the assumption that the

United States is a net importer of oil and gas. In other words, the U.S. gains from

lower oil prices with very little of the losses.

Over the past 10 years, though, the oil and gas industry has changed

dramatically. North Dakota now produces more oil than Alaska. Combined with the

exploding growth of the natural gas industry from fracking, the U.S. is currently

producing a much larger percentage of our oil consumption and we are virtually selfsufficient

in our use of natural gas.

When energy prices drop, geographic areas heavily reliant on the oil and gas

industry may suffer as companies stop investment and expansion, idle production

and curtail jobs. And that's exactly what's happening: with the recent drop in oil

prices, oil service companies such as Schlumberger and Halliburton have cut nearly

25 percent of their workforces.

The results of these cutbacks and layoffs are not limited to those directly working in

the oil and gas industries, but also with the businesses where they buy equipment

and modernize their facilities. Layoffs also impact the business where employees

spend their money buying housing, cars, food and entertainment. More than 10

million jobs are now tied to the oil and gas industry in the U.S.

For American consumers, then, there's a yin and yang effect: we are saving at the

pump, but we feel the chilling effects of a hurting oil and gas industry. Despite the

savings of lower energy prices, the overall effect may be a net negative as industry

slows investments in drilling operations, followed by less spending on their day-today

operations and layoffs.

The impact is uneven geographically: regions like the large populations of the East

and West Coasts, which have economies that are less dependent on the oil and gas

industry, will benefit from cheap oil. At the same time, regions more dependent on

the oil industry, including Texas, North Dakota and Alaska, have suffered. As

recently as 2014 all 50 states were creating jobs. Now oil price reductions threaten

many of those new jobs in Texas, Louisiana, Wyoming and North Dakota, potentially

moving those states back toward recession.

Meanwhile, oil-producing countries around the world are keeping the spigots open,

creating a market glut that has driven prices from $100 per barrel in 2014 to under

$30.

With oil companies suggesting their true cost of production to be near $50 per barrel,

they and their suppliers are burning through cash reserves at an extremely fast rate.

Hedging helps for now

As painful as the downturn is in the oil and gas industry, the worst may be yet to

come as bets placed by banks and commodity traders play out.

Both buyers and sellers of commodities utilize the futures markets in an attempt to

reduce price risk. Buyers of commodities purchase future contracts - called hedging -

on the open market, essentially betting that prices for what they will need to buy in

the future will go up.

This is like buying car insurance. Your premium is essentially a bet that you will get

in a wreck. The insurance company is betting you will not. If you do get in a wreck,

your losses are covered. If you don't, the insurance company keeps your premiums.

You are out the premium in any case but happy for the peace of mind.

Buyers of futures contracts are essentially buying insurance against price increases.

If prices do go up, they buy at the lower rates on the contracts. If the prices stay

below the contract, they are out the premiums but are happy for the peace of mind.

In a similar way, oil companies can buy future contracts to sell (rather than buy) at a

given price, essentially betting that prices will fall. For example, an oil company could

buy a future contract to sell at $60 per barrel and know it will be profitable even if

prices drop below that price.

Most oil companies regularly purchase these contracts a year or two at the most into

the future. This means that they can still get $50-$60 per barrel for the oil they sell

until those contracts run out. For now, oil and gas industry losses due to plunging

prices are mitigated by the hedges.

With prices hovering around $35 per barrel, who takes the losses from these

hedges? In effect, the oil companies transferred their current operating losses to

those market traders who sold them the contracts, or 'took the bet.'

But hedges are usually short-term in nature - no more than one to two years out -

and many of the contracts are expiring. With much of the industry unhedged beyond

one or two years, oil and gas companies are now likely to see significant losses.

Why? The cost of production is greater than current and near-term expected

prices and companies no longer have hedging contracts to shield them.

Many U.S.-based oil companies also sell natural gas, but that, too, remains very

cheap and abundant, causing the same profitability challenges as the oil supply glut.

Banks getting worried

Banks, too, are vulnerable to a financial reckoning at oil and gas firms.

Like the housing boom of the early 2000s, no one thought the price of oil could fall in

a sustained or significant way. With prices peaking over $100 per barrel in the spring

of 2008 after the housing crisis, banks were looking for a safe industries to invest in.

In response, banks loaned hundreds of billions of dollars to oil and gas companies to

invest in domestic oil infrastructure.

But things have obviously changed. If the prices stay low as expected, and the

hedge contracts expire, how much exposure do the banks have to very risky oil

industry debt? How will it compare with the housing bust/debacle?

Several financial institutions are already building reserves to offset the fallout. JP

Morgan and Wells Fargo just set aside $2.5 billion in additional reserves

in anticipation of losses on oil and gas loans.

Internationally, some suggest that low oil prices keep pressure on Russia, Iran and

Venezuela and potentially force political change, but these low prices could do more

harm than good when it comes to the domestic economy.

For those of us happy with lower prices at the pump, the law of unintended

consequences could be huge.

Wall Street is drowning in oil. Stocks are having their worst start to a year in history in part because of a rapid plunge in the price of oil. The price of crude is down 28% this year already, which in turn has dragged down energy company shares in the Standard & Poor’s 500 index by 13%, which has helped pull the overall index down 9%.

This even though low oil prices and the cheap prices for gasoline and other fuels that result are wonderful for consumers and many companies.

“It seems ironic that in the run-up to the global financial crisis we were worried about oil prices being too high in 2007 and 2008. Now we’re worried about them being too low,” said Julian Jessop, head of commodities research with London-based researchers Capital Economics.

The drastic drop in oil and stock prices stands in contrast with a US economy that, on the whole, is doing pretty well. US employers created 252,000 jobs in December, and few economists see the economy sliding into recession.Here’s what experts think is going on.Why is oil so low?Because there is so much of it.A long run of high oil prices inspired drillers to develop new techniques and to go to new places to find more oil, and they succeeded. In the US improved oil drilling technologies known generally as fracking have added more oil to the global market than the total production of any country in Opec, other than Saudi Arabia.

Producers in the US and abroad haven’t cut back production very much, despite the low prices, and now the lifting of international sanctions against Iran could send more oil flowing into markets that are already awash in crude.

US stockpiles are at their highest level in at least 80 years, and the International Energy Agency predicts that during the first half of this year global oil supply could outstrip demand by 1.5m barrels per day.

Demand for crude has been growing steadily, but that may not last because economic growth in China, the world’s second-largest oil consumer after the US, is slowing.

Why do low oil prices hurt the stock market?Oil company profits are plummeting, so oil company shares are plummeting, and that is dragging down the whole market.

Analysts estimate that profit for all S&P 500 companies in total are on track to be down a recession-like 5.8% for 2015. But if energy companies were removed from that figure, S&P 500 profits would be up a very healthy 5.7% for the full year.

That profit drop directly leads to lower share prices that drag down entire indexes. Two of the biggest oil companies in the world, Exxon and Chevron, are part of the 30-member Dow Jones industrial average. Of the 20 biggest share price losers in the S&P 500 this year, 13 are energy companies.

Investors are also selling shares of companies that may have exposure to the oil industry, like certain banks. And the price of oil has now fallen so low that investors are also worried that it could mean global economic growth is much weaker than expected, which could hurt all companies.

Aren’t lower oil prices a good thing for the economy?It depends on why prices are lower.

If they fall because new supplies have been found, it usually helps the broader economy, and markets held up fairly well during oil’s big slide from over $100 a barrel in 2014 to under $50 a barrel last year.

“In the long run, lower oil prices should be positive or at worst neutral for the world economy because all they’re really doing is transferring income from oil producers to oil consumers,” Jessop says.

But this latest plunge in prices to under $30 a barrel has investors worried that oil prices are falling because global growth is slowing, as businesses and consumers in many developing countries, particularly China, cut back on spending. Bruce Kasman, chief economist at JPMorgan Chase, says that steep drops in oil prices have historically been a sign of a weakening global economy.

Also, US consumers have remained cautious about spending the money they aren’t putting into their gas tanks, which limits the benefit to the broader economy. Americans saved 5.5% of their incomes in November, up nearly a full percentage point from a year earlier.

Kasman estimates that US spending grew at a tepid pace of just 1.5% in the final three months of last year. “There’s no doubt that the consumer spending growth figures for the US, Europe and Japan have disappointed,” he said.Some of that probably reflected a temporary drag from warm weather, as Americans spent less on winter clothing and utilities. That could turn around in the first quarter, giving the economy a lift, Kasman said.

Delta Air Lines told investors this week that bookings for this spring are ahead of last year’s pace because cheaper gasoline means consumers have more money.Could this lead to broader turmoil, the way the subprime mortgage crisis did?It is already having some ripple effects, but the energy market isn’t nearly as big or far-reaching as the housing market.

When oil prices were high, lots of banks, including some of the biggest on Wall Street, made loans to energy companies to finance drilling in North Dakota, Texas and elsewhere. Dealogic estimates that the oil and gas industry has roughly $500bn in outstanding debt. According to the Federal Reserve, there is $11tn in outstanding residential mortgage debt.

Still, some are feeling it. Oil company cash flow is slowing, and companies are finding it harder to repay their loans. Oil and gas company bankruptcies are rising, and the entire market for so-called junk bonds has been shaken as a result of energy company defaults.

JPMorgan Chase, Wells Fargo, Citigroup and Bank of America all had to write down the value of energy loans or set aside more money to cover losses. BofA executives told investors this week that energy loans were roughly 2% of its total loans. Smaller regional banks could to be more exposed relatively than the big Wall Street banks.

Is there an oil price that would be good for the market and consumers?Jessop thinks that a price of about $60 a barrel would do the trick. “High enough to keep the main producers in business but low enough to provide a real boost to the incomes of consumers,” he says. He expects prices to return to that level by the end of next year as oil companies pare back exploration and the glut is worked off.

I agree with experts answers, thanks for the invitation. ..

Of course it already has done the damage globally. That's just a warm up, the real crash in world economy is expected to come soon...end of this year. 

I leave the answer to the experts, specialists in this field

Yeah sure, it will hurt US economy as well as global economy,