The Ups And Downs Of Low Oil Prices

When most people think about oil prices, they assume that the lower they are, the better for the U.S. economy. The reality is far more complicated, especially for anyone connected to the energy industry.

Indeed, the oil and gas sector has shed more than 100,000 jobs over the past year and has slashed billions in capital spending as a growing worldwide supply glut has kept prices depressed. On Tuesday, oil fell below $38 per barrel, its lowest level in nearly seven years. Heading into the holiday season, many investors are hoping that correspondingly cheap gasoline prices will put consumers in a mood to spend.

But that's hardly a sure bet.

"We have had low energy prices for over a year now, and all it has done is provide a floor to consumer spending," said Lindsey Piegza, chief economist at Stifel Fixed Income. "That wealth effect has already come and gone."

Residents of Victoria, Texas, close by the Eagle Ford oil field, are among those feeling anything but a wealth effect from tumbling crude prices. They're watching with concern because the oil industry is a major local employer, and companies with operations in the area such as Halliburton (HAL) have laid off thousands in recent months.

Unemployment in Victoria, though, is only 4.2 percent, well under the national average of 5 percent. That's because officials have lessened the region's dependence on the boom-and-bust energy industry by attracting new employers such as Caterpillar (CAT) to the area over the past few years.

Still, "I lose sleep over (oil prices) every day," said Randy Vivian, the head of the Victoria Chamber of Commerce, in an interview, adding that many displaced workers have taken jobs for lower pay in other industries and "are having to downsize their lifestyles."

Victoria's circumstances aren't unusual in Texas, whose corporate citizens include Exxon Mobil (XOM), the largest publicly traded oil company. But even as the latest fossil fuel boom has gone cold, the state has added 203,900 jobs since October 2014, according to the Texas Workforce Commission, and the statewide unemployment rate is 4.2 percent.

"Texas is a very well diversified economy," said Chris Lafakis, senior economist at Moody's Analytics, in an interview.

National oil and gas sector employment peaked at 653,000 in December 2014 and has shed about 109,000 jobs since then, according to data from the Bureau of Labor Statistics. The pressure on the industry's bottom line is expected to intensify, at least in the short term, in the wake of OPEC's decision not to lower its output at its ministerial meeting last week.

"There was an expectation that cooler heads were going to prevail and there was going to be some output restrictions or output targets," Piegza said of the OPEC meeting. "What we found is ... we are going to see, pump, pump, pump as much as possible, which will continue to add to the global supply glut. And that will only compound the downward price pressure."

Some analysts expect prices to plummet as low as $20 a barrel, though Piegza thinks a $30 level is far more realistic.

However, Lafakis expects U.S. energy production to fall next year because of the cuts the domestic industry is making this year. Will such an output drop lead to a price rebound and better times in oil-patch towns? That, too, is hardly a sure bet.

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