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Crude Economics
US Firms Having a Cheap Oil Field Day

Companies are publishing their 2014 earnings reports this week, and while the big news is that the U.S. economy grew slower in the fourth quarter than it did the third (though still expanded a respectable 3.5 percent), there are some very encouraging signs for the American economy. The FT reports:

The rout for oil companies obscures perceptions of the rest of the corporate sector. Including oil, analysts now expect earnings growth of exactly zero for the current quarter. Outside oil, however, companies are slated for growth of a respectable 7.9 per cent — following what now looks like growth of 8.6 per cent in the fourth quarter of last year. Outside energy, companies are playing the usual game of earnings management, and doing so successfully, with more of them providing a positive surprise to the market than usual. Forecast earnings have crept up this month, away from energy.

It isn’t easy parsing the economic effects of the oil price plunge on the American economy. On the one hand, sub-$50 per barrel oil threatens the profitability of many of the companies and plays that have contributed to the U.S. shale boom. This is a buyer’s market, and it’s a decidedly painful one if you’re a seller (just ask Russia about that).

But while the oil and gas sectors are taking a hit, the rest of the American economy is reaping the benefits of cheap energy inputs. Previous analysis has said the oil price crash is a net benefit for the American economy. Take that, Saudi Arabia.

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  • Maddog

    I have little concern for the US oil and gas industry. Like most US industries, they are quite capable of dealing with the vagaries of competition and adversity. This will set back many of the high cost producers but many are no where near this category. Ultimately, the Saudi’s are playing a very dangerous game. The most likely outcome of this price shock is that US producers will begin to focus on cost reduction through more automation, reduced employment, and better drilling and pumping techniques. If the Saudi’s are lucky, this will allow US producers to drop costs by a significant amount. If they are unlucky, US producers will find ways to drop costs by an order of magnitude, which would leave the US as the largest producer and with the lowest production costs.

    Let’s hope for the latter.

    Mark Sherman

  • Jacksonian_Libertarian

    Modern western civilization is built on cheap energy, as it has replaced muscle power in nearly every way.

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