West Texas Intermediate (WTI) oil for December delivery is currently priced at $75 per barrel, Brent for January delivery at $78 per barrel. Many investors, publications and news sources focus only on the drawbacks to falling oil and gas prices—don’t get me wrong, there are many—but today we’re going to give the spotlight to the biggest winners and beneficiaries.
Starting with your pocketbook.
Oil has slipped 30 percent since July, but the only place in the world where retail gas has fallen as much is Iran. In most countries, gas is down between 10 and 15 percent. Here in the U.S., ground zero of the recent energy boom, the national average has fallen close to 20 percent. As I said last week, American consumers have been treated to an unexpected tax break because of this slump, just in time for the holiday shopping season.
Three of the main contributors to oil’s decline are the strong U.S. dollar, which has put pressure not only on oil but other commodities as well; geopolitics, specifically tensions with Russia and the Saudis’ currency war; and the acceleration of American oil production. The hydraulic fracturing boom has flooded the market with shale oil, which in turn has driven prices down. As you can see below, there’s a wider spread between 2008 and 2014 oil production levels in the U.S. than in any other oil-producing country shown here.
Which Countries Benefit
Last month I briefly discussed how low crude prices benefit Asian markets the most because they tend to be net importers of oil and petroleum. On top of that, a large portion of the population in these countries spends a significant amount of their weekly income on gas—in the case of India, as much as 30 percent. The biggest winners, then, are Asian countries such as India, Philippines, Thailand and Indonesia.
China, the world’s largest net importer of oil, second only to the entire continent of Europe, also benefits. For every dollar that the price of oil drops, its economy saves about $2 billion annually. Even though it just signed a multibillion-dollar, multiyear gas supply deal with Russia, China plans on tapping into its own shale gas resources, estimated to be the largest in the world.
One notable exception to the Asian market is Singapore. Although the city-state is a net importer of crude, bringing in around 1.3 million barrels a day, it depends heavily on oil exports to grow its economy. According to Bloomberg, in fact,Singapore ranks second in the world for a reliance on crude, based on a change in oil exports as a percentage of GDP from 1993 to 2018. Only Libya’s economy is more dependent.
Because the United States continues to be a net importer of crude and petroleum—it imports around 6.5 million barrels a day, according to CLSA—it has benefited as well, but its dependence on foreign oil is falling fast.
In the chart below you can see how breakeven prices increase as both global oil demand grows and the geological formation requires more sophisticated—and expensive—extraction methods.
Which Industies and Companies Have Benefited
To answer this question, Strategic International Securities Research (SISR) ran a correlation coefficient between the retail price of gas and 72 global industry classification standard (GICS) sectors, focusing on the years 2000 through 2014. Below are the top three sectors that ended up benefiting the most from falling gas prices. They all have a negative correlation coefficient, meaning that their performance has historically gone in the opposite direction as the price of gas, similar to a seesaw.
What this data shows is that the U.S. manufacturing industry has regained the cost benefit advantage to Chinese manufacturers. It’s becoming more and more attractive to build and create here in the U.S. because the cost of energy is relatively low.
Leading the list is automakers, suggesting that when gas prices have dropped, consumers have felt more confident purchasing new cars and trucks. Today consumers are even returning to vehicles that are known to guzzle rather than sip gas, such as SUVs, pickup trucks and crossovers. Ford’s F-Series continues to blow away its competition. Since mid-October, General Motors has delivered 7 percent, Ford 11 percent and Tesla, which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX), 12 percent.