Is oil the next sub-prime mortgage debacle?

As I look over all the stories about the price of oil I was surprised to find out how leveraged the industry is. What happens if most of the loans to oil related companies are defaulted on? What happens if many of the oil related companies file for bankruptcy protection? What kind of exposure do banks have to these loans that were once “risk free” and are now basically “junk”? I think this all could turn out to have a major impact on our economy just as the debacle with sub-prime mortgages had in the last financial crisis. As the price of oil stays low (or goes lower) we can expect a wave of defaults and bankruptcies across the oil industry that will have a serious negative impact on banks and other financial institutions. I think we can see another “Lehman” event occurring in the near future all because the price of oil has fallen so low. How would have ever thought that this could happen? Oil was supposed to be risk free. Maybe nothing is risk free.
What do you think?

Our economy is in serious trouble

I just discovered an important truth. Supper low oil prices are a disaster for our economy. Let me explain. The energy sector is one of the most important parts of our economy. If the energy sector is healthy (making a good profit), then our economy is doing fine. Oil and natural gas account for about 8% of the U.S. economy. It is over a $1 trillion-dollar industry. Not only is oil and gas one of the largest sectors of the economy, it is one of the largest employers and one of the largest tax and fee paying segments. So when oil and gas are hurting, it has a direct impact on our economy. Yes, high oil prices hurt the economy, but supper low prices are even worse. With oil under $40, the oil and gas sector is going to get hit hard. With it will come a huge hit to our overall economy that very few seem to notice.

I like lower gas pieces (though they have not been all that low in California), but not when it starts costing profits, jobs, and tax revenue. I oil and gas remain this low, buckle your seat belts, this is going to get ugly.

Tax rant

I did my taxes this past weekend. Like usual, I had to pay extra even though I don't take very many deductions. That was expected. What I did not expect was it to be way more than I usually have to pay. My wife and I are both teachers and we make good livings here in California. Over the last 10 years we have consistently made a bit more every year (even during the cuts that happened after the last recession). But, all the increase has gone to pay for taxes and health insurance. Our take home pay has not increased at all in 10 years! This year we are on track to bring home less for the first time! This is so infuriating. The more we make, the more we pay. Now I don't mind paying for the things that make all our lives better (clean water, power, good roads and schools, fire and police, etc…), but at some point it has to be enough!

At this point it is very tempting to file for bankruptcy, have my wife stay home from work, and move to another state where there is no state income tax. I might not have that much less after I pay all my bills!!!!

What does that say about the state of our economy that when you make more money, and you end up with less? Why bother working harder? Why bother seeking to make things better? Why bother going to school to make yourself more valuable? There is no incentive to become more than you are.

Is anyone else in this situation? What are you doing about it?

The Economy - Stocks

Stocks were down considerably yesterday. So far stocks have been down for the first two trading days of 2015 (and are down thus far today). The big news though has been oil, which is still falling. Oil is now bellow $50 and still falling! Lower oil prices is good news for those of us who do a lot of driving (and anyone else who needs a break in gas prices), but the sudden collapse is not good for the rest of the economy. Just today US steel announced that it is idling two steel plants and might be laying off hundreds of workers all because of the fall in oil prices. Yes, oil was too high, but the high prices were driving a boom in everything related to the oil business (and many other sectors of our economy as well), which included a lot of great paying jobs. Now the layoffs and idling will begin, which will spread across the economy and cause a recession. The last thing we need right now is a recession. If the price of oil stays below $50 for any prolonged period of time (six or more months) things will get ugly. I think these down days on the stock markets will not be our last.

Economy - Oil!!!

Oil was down even more today. It looks like it ended the day at about $58 a barrel. Oil was as high as $107 earlier in the year. So the price has collapsed by about 50%. It is interesting to note that in 2008 oil fell from $140 to $35 by the end of the year. Could we be seeing a similar occurrence? In 2008 oil fell by $100 a barrel in 6 months (a 75% drop)! If oil follows the same path we could see oil at close to $30 before it stops falling. Now that sounds unlikely, but it has happened before, so why would this be different? What is also interesting is that stock prices eventually followed the price of oil. The S$P 500 fell from 1560 to 666, a fall of about 60%. So we could see stocks fall by as much as 50%. That would put the S&P 500 easily bellow 1000. So here is what I am predicting. Oil will fall below $40 and the S&P 500 will fall below 1000. Unfortunately I can’t put a date on it, but I would think that within six to nine months to be reasonable. Wow, things are going to get ugly.

The Economy - Price of Oil

I love going to get gas. The price just keeps falling and it is so nice to have a few more dollars left in my pocket. Unfortunately, as I have pointed out before, falling oil prices are good for consumers, but not so good for producers. As I write, domestic oil producers are announcing job cuts, reduction in production, and a curtailing of future oil projects. This is especially the case for shale oil producers who need oil to be above $70 to make a profit. Now I am not a fan of the oil companies (as many others), but they have become the driving factor in the current economic recovery (if you even believe we ever had one). If you take away the jobs and money infused into the economy by the oil producers, you can kiss any hopes of a sustained recovery away. If the price of oil stays below $70 for any length of time (six months or longer) we will have serious repercussions in our economy. Hopefully oil prices will settle at about $75 a barrel and we will have some stability. If not, hold on because things can get ugly.