The continuous decline in the price of oil also has a negative side. The obvious winners are consumers and the losers are energy companies and their stock prices. Cash-strapped consumers have more spending money because they pay less for their fuel. They have extra money to spend on consumer goods like new clothing for the children from My Little Pony Pajamas and for entertainment like watching movies and eating out instead of money being poured into gas tanks. However, it is not all sunshine and roses from an investment perspective.
Energy firms and their stocks have taken a severe beating; Investors are not knocking on their doors. Firms in related industries also experience less robust business. States like Texas and North Dakota which are the hotbeds of energy activity will have less money and it is expected to impact heavily on the housing market. Few real estate transactions impact on the livelihood of real estate agents, lenders and appraisers. However, oil prices at less than $60 per barrel have boosted the fortunes of many companies in other sectors.
In order to understand the ramifications of low oil prices, the phenomenon can be broken into parts; the impact of individuals and the impact on countries. From the standpoint of individuals, low gasoline prices are a blessing because it has increased their discretionary cash flow. Extra cash can have a potential positive effect on certain stocks, particularly shares in discretionary business. On the other hand, the energy sector has been one of the stimulators of domestic economy and a drop in capital expenditure means a drag on domestic GDP.
From the standpoint of countries, the question is whether you are importer or an exporter. The US, Japan, India, China and most of Europe are net energy importers and low prices means spending less. But what benefits the net importers will hurt exporters like Russia, Iran, Venezuela and Mexico. What is not anticipated is that the drop may result into a black swan type of event in the geopolitical front. Another event involves high-yield debt that is energy related like fracking. As individuals stretch for yield, they may eventually find themselves with bond allocations that may be significantly riskier than they anticipated.