The Road Back from Oilmegeddon

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The Road Back from Oilmegeddon

Thanks to the North American Energy Revolution and the resulting fall in oil, gasoline and natural gas prices, the share of total consumer expenditures going to pay for “energy goods and services” fell to 3.92 percent in December.

That’s a lower share than in all but six months of official Bureau of Economic Analysis data going back to 1959. And it’s likely that the energy share of consumer expenditures in January and February 2016 will fall to all-time record lows as the price of oil continues to plunge.

Just about every economic commentator says this is a bad thing, foreshadowing a disastrous wave of bankruptcies, stock market crashes, deflation, and political turmoil.

However, that’s not surprising because they are typically paid to see the world from the point of view of producers, rather than consumers, who are enjoying a big cut in the cost of living.

Admittedly, the ongoing oil price collapse is having a severely negative impact on the wealth of those who own oil reserves. Several pundits have referred to this disruption as “Oilmegeddon.” The numbers are enormous and the threat to certain companies and nation-states may be existential. The short-term reality is that we are witnessing global wealth destruction of epic proportions.

Consider this: In mid-2014, crude oil prices averaged just over $100 a barrel, depending on which grade you wanted to buy. At the end of February 2016, prices hovered near $30. That’s roughly a 70 percent decline.

Based on the reduction in the value of oil reserves, this means we’ve wiped over $100 trillion in paper assets off global balance sheets in just 18 months.

Stop for a minute and let that sink in.

The total value of all the world’s oil reserves is over $100 trillion less than it was just a year and a half ago. No wonder stock and bond markets are down as sovereign wealth funds liquidate securities to cover shortfalls created by this evaporation of net worth.

But all is not negative. Since mid-2014, the collapse in the oil price has already transferred over $2 trillion from petroleum producers to petroleum consumers, worldwide. And rather than simply changing the numbers on the balance sheet, this has impacted the P&L and cash flow statements. This impact will be truly enormous and pervasive.

Why?

Petroleum is the largest and most indispensable commodity on which society depends; it’s the vital energy-amplifier of our everyday actions...

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