Market Plunges Over Oil,
Not the Coronavirus

I want to disagree with Rush on one small point - not his fault, it's just that the common wisdom is wrong. Fracking has been around for over 50 years. It is nothing new. What is new, and what has stimulated all the new production of oil and gas, is the ability to drill down 2.5+ miles in the ground and then divert the hole horizontally - in shale, no less! Shale is not a hard stone - it is crumbly. The magic is to keep the hole open while drilling horizontally through an inherently crumbly formation. Yes, you can frac it, but that is icing on the cake. The old way of drilling was you went straight down, hit a gas or oil bearing formation, you set tubing, punched holes in the tubing at the level of the productive formation, did your fracking in that formation, and hoped for the best (oversimplified, but close enough). Your productive zone might be 50 (or 10) feet thick, so you were limited to what you could get out of that 10 - 100 feet of zone. With horizontal drilling you drill not through the formation, but horizontally IN the formation, maybe 1000 or more feet. You've got 10+ times the productive zone to complete in and produce from. And you can drill several wells from the same location, basically with horizontal holes, 2.5 miles down, going north, south, east and west from the same well site! Yes, you may frac it to increase production from each hole, but that is NOT the magic - horizontal drilling is! But that is hard for progs to make sound scary, so they go with fracking.

Yes, directional drilling was the second development. I managed project commercializing a Russian directional drilling tracking system so that they could tell where the bit was. Amazing technology. And yes, Rush is right, the issue was that a number of large US oil and drilling support companies were down because the cost of oil being down hurts their business. But in reality, Russia and Iran will be hurt more dramatically since they have very little industrial products to export, so depend on cash flow from oil and gas exports to float pretty much their whole economies.

i listened to him yesterday - i read the transcript today - i have a degree in econ and still do not see how lower oil prices are harmful to the economy or stock prices

What is your point #3? It is wonderful that you have a degree in economics but what is your work experience and knowledge as a result of that work experience?

Apparently #3 doesn't understand that the actual cost of getting the oil out of the ground has a set point. If the 'worth' of that oil goes below that point, then it costs more to take it out of the ground and refine than they price they'll get for it on the open market. Producers will be operating at a loss. Maybe he needs to ask for a refund for that econ degree??? AOC? Is that you?

The stock market became overvalued and now closer to fair value. It was trading at 19 times earnings and has come back near 15 times. Average is around 16 times earnings. It could go lower but may now be close to a bottom. Lower oil prices can be harmful to the economy or to stock prices because overly leveraged exploration companies may default on debt or lay off workers as profits plunge. Net importers of oil should experience economic stimulus from lower oil prices.

A sudden and drastic drop (20%+) in new oil prices, the black stuff fresh from the ground, hurts the world economy short-term, not long term when it becomes good again after adjustment. It's the transition period that hurts as you get a whip-saw effect. The lower fresh oil cost means if you are let's say Exxon/Mobile and have a crew out on a platform or doing "fracking" and they cost you $50 a barrel to produce the crude oil and the price for a barrel drops suddenly to $40 --- then you don't need that crew and expense, do you? You lay them off until when? The price goes back up! Hello? And if you had a stockpile of 1,000,000 gallons you thought were worth $50 million ... well now that stockpile is worth only $40 million. No big deal as it's a paper loss ... until the bank you used that collateral for your $50 million dollar short-term loan calls you up and says: "You need to put up more assets to cover my potential loss!" if you want a longer loan. If you can buy oil cheaper from someone else, then you don't need thousands of employees! They get laid off (temporarily) and the ripple effect is that they don't have the same buying power. That means neither do their families consume as much ... they don't have the income rolling in. Thus, there are less purchases from Walmart's, no more McDonald's, put off buying the new truck, no ballet lessons, no dry cleaning, less cable, less discretionary spending overall, etc. Thus, the companies that make that stuff you and your family used to enjoy don't need as many people to produce stuff you can't buy --- so they lay off their workers. Those who get laid off, cut their spending too. See the ripple effect? Then you sell the stock of the oil company and those producers of stuff the laid off guys used to buy as their annual profits will be way down this year. And we're off to the races. There goes the Dow! And I don't have a degree in economics.

I have to agree with #3. With lower oil prices the cost of getting goods to market, most forms of transportation and home heating expenses are drastically reduced. How possibly can lower oil prices be harmful to the economy and what is the correlation with the stock market? What frightens me is the manipulation and corruption. Perhaps #4 can enlighten me too. I am sincerely baffled.

I only know what I see at the pumps and what I pay for heating oil and I haven't seen any drastic price drop. Matter of fact I haven't seen any drop at all.

Not to mention plastics - - and lots of other things which are made from crude oil. Rush took a big swing-and-a-miss yesterday. But - - that's OK - - even Babe Ruth had his three-whiff days.

As Rush hinted, but did not really develop, the price drop by the Saudis could be targeting American oil production as much or more than Russian oil production. The Saudi Prince is not a vengeful idiot, but is a savvy businessman, much better at economics than some of the graduate economists on this thread. He knows that American oil, dependent on high-cost fracking, is far more price sensitive than Russian or Saudi oil. But if he can reduce American oil production while also doing great harm to Russia, then he gets a two-fer. As to the drop in American stock prices, its cause is the effect of the certain drops in the stocks of oil companies and oilfield services caused by the oil price cut, compounded by the drop in the stocks of airlines, travel, tourism and entertainment industries caused by the corona virus scare.

The stock market plunged because people manipulated it. Its an election year, and they want to effect the outcome. Oil and coronavirus are convenient scapegoats.

As to how a drop of oil prices affects the stock market, those of us around for the 1985 and 1998 oil price crashes know. When prices drop below what it costs to bring it to market, drilling stops. Those good-paying jobs go away, jobs that are filled mostly by young men with young families. That means supply companies sell nothing, so those folks get laid off. Service companies like Halliburton and Schlumberger and thousands of smaller companies have no work, so they have lay-offs. The stores in those towns that are somewhat dependent on those jobs to fuel the economy suffer. Some lay off, some close. The irony of the late 1990s was that while the rest of the country was booming because of cheap energy prices, those areas dependent on the O&G business were depressed. The O&G business has always been a boom-and-bust business, It still is. When prices are high ($50 per bbl. is the generally stated number that's necessary to make drilling worthwhile), times are great. Lots of wells get drilled. Then they all come online, there's a production glut, prices plummet. Over the next few years the older wells that aren't producing enough to pay for themselves get shut in and plugged. Supply goes down, prices go up, and the cycle starts again.

Exactly. Oil war between the Saudis and Russia. Some of the financial reporters have gone berserk over the coronavirus. A surprise: Maria Bartiromo. She is absolutely wild-eyed on the subject. Has been all week long. And there are others. This doesn’t help. I would have expected Maria to know what the actual cause was...

From an article from the South China Post (Hong Kong) posted a while ago: Global oil demand was already in the doldrums amid widespread restrictions on trade and travel in the wake of the novel coronavirus outbreak But Russia balked at oil production cuts, the Saudis slashed prices in retaliation and global markets went into a tailspin on Monday The rest of the article is here: https://www.scmp.com/week-asia/explained/article/3074403/why-did-saudi-arabia-start-oil-price-war

#3 makes a legitimate point in long term outlook. Yes, short term the domestic oil industry takes a hit but every petroleum product (plastic too) plus shipping costs for everything else just went down. China just doesn't need as much oil at the moment, give it 6 months. The simple fact we are no longer reliant on unpredictable Muslim potentates for our oil is a great President Trump plus. Should this not resolve within the next few months, I don't think he will let our domestic oil production get demolished just because a Saudi princling throws a temper tantrum and starts a trade war with Russia. The Saudis need to.learn they aren't in control anymore.

#5, no, the producers will NOT "be operating at a loss", they are not that stupid. They will stop selling their oil until the price improves. Oil is not strawberries, it has been sitting in the ground for millions of years, won't be hurt by being left another month or year. Strawberry sellers HAVE to sell, oil sellers, not so much. If the international price drops below the production cost on a given well.....they stop pumping, for gosh sakes. And if, for a while, we were to import a lot of really cheap Saudi crude, that is just fine for the consumers. All that drilled and ready to go US oil is what will prevent the Saudis from repeating their 1970s deal of withholding oil to artificially drive up the price. Once the international oil price reaches a profitable level, the US pumps will be switched back on and the US oil will flow to make up any Saudi shortages that they might create in an effort to increase prices. Win, win for energy consumers, the largest of which are businesses. Not so good for oil producers while the market sorts itself out. Pretty unlikely that the oil prices will stay really low for a long time. But demand is falling - cars today use about half or less the fuel needed 50 years ago when the Saudis pulled their oil price scam.

Lower oil prices hits two ways. Oil producers are hammered with lower profits and some cease drilling. Oil jobs are lost. But everyone else that uses the oil gets it cheaper and their businesses become more profitable and they hire more people. With lower prices we may switch to being a net oil importer for a while. No big deal because we have already shown we can easily be a net exporter when it is profitable for us. Unlike Saudi Arabia, Russia, and Iran we can be a productive country when the price of oil is low because we have many things we can sell while they pretty much only have oil and gas. I'm liking Russia more and more and if they could just get rid of their mafia like corrupt government and get a free market cranking they too could become productive and not rely on only oil and gas. There are some very sensible things about the Russian culture. And they have fastened down their borders in the face of this virus.

Except oil is plunging because of the virus. Decreased travel, air travel in particular, is decreasing demand.

I get why oil company stocks are taking a dive. And yes some oil fields may need to stop producing temporarily until prices rebound. That oil will simply be "shut-in." The owners may change hands but the wells and the oil aren't going anywhere. After prices rebound, turn the pumps back on. But the rest of the market (that uses oil) should not be falling. Their cost of production went down. Plastics? Down. Transportation costs? Down. And 200,000,000 driver's weekly fill-ups just got cheaper also. In short, the oil patch's loss is everybody else's gain. The overall market should not be going down because the price of oil.

Im no great shift at economics, but I have lived long enough in Houston (native) with my husband in the engineering industry that depends greatly on the cost of oil (the 80s turned Houston into as much an engineering city as it was exploration & drilling). The local truth of it is that whenever oil prices are down, companies in Houston start massive layoffs. Yeah, there's lots of cheap(er) gas for everyone, but companies can't make a profit to pay its engineers and all the subsequent support people it involves to renovate and run a refinery or drilling operation. Whenever the price is high, however...well, that's when Houston becomes the economic attraction that we've all been seeing. I've lived with an engineer husband long enough to see the industry go through several valleys and peaks. Right now we're in this weird holding pattern. Don't get me wrong. Im glad that America is able to produce its own oil...but the economics is still shaking itself out...

#7 did a pretty good job of explaining things. Economics degrees are a fraud. Oil jobs, and the other jobs created by oil workers consumption, pay good money and when the business is doing well the oil people buy a lot of quality products made in America. When oil is cheap, that goes away and hurts a LOT of businesses. Production from fracked wells does drop over time, sometimes rapidly, and those wells have to be reworked or replaced. When oil is cheap enough to stop drill wells for any length of time, shorts supplies Will show up and Everyone will pay the price for that short term loss to oil supplies at the pumps. Each time drilling picks up, fewer suppliers exist because not everybody can put their life on hold and not pay bills just to make an economics major feel good. We do NOT need to import oil just because it is cheap for now, that just give the supplier the upper hand, makes us defenseless against enemies, and makes it more expensive to get production going again. Oil wells can be drilled and fracked later which helps some, but everything has its limits. Cheap oil helps a lot of industries in the short term just like importing everything including our underwear from somewhere cheaper does, but it all comes back to bite us in the s sooner or later.

Cheaper oil usually is a stimulant to the economy, so enjoy the lower gas prices while they last. Remember the airlines, UPS, Fed Ex, and a number of other large transportation companies have all raised their prices in the past blaming increased fuel costs. They can't do that this time. However, I'm not holding my breath looking for these same companies to lower their prices due to a decrease in fuel costs.

Read the intelligent responses, but couldn't I just enjoy less expensive gas for awhile ? Isn't a lot of the media in response to a second term with Trump? Doesn't Sorryos manipulate the market?