Texas Tea

The price of oil dropped below $60/barrel today, which represents a 40% decline in just a few months.  Those of us in Texas have mixed feelings about this: on the one hand, it’s nice to pay less at the pump, but on the other hand our economy has boomed recently due to the Eagle Ford Shale, and higher prices have enabled this play to be worthwhile.  Lower prices will mean less capital expenditures, fewer jobs, and this will impact many people and companies as the reduced spending flows through the economy.

How does this relate to investing?  Ultimately, companies in the energy sector, particularly those who have leveraged themselves in order to do speculative exploration, will suffer.  There will likely be many mergers/buyouts as the smaller and/or leveraged players begin to fail.  Also, much of the debt which funded the exploration is in the high yield bond space; in fact, about 20% of high yield bonds are from energy, so high yield bonds will be impacted as well as some of these companies’ cash flow shortfalls will make their debt repayment impossible.  OPEC seems very happy to allow the prices to stay low, so these pressures could remain for some time.

Lower oil prices have caused positives, though, in travel, entertainment, and leisure.  When it costs less to drive or fly somewhere, people do more of it.  Restaurants have already seen a major uptick in the last few weeks as even short trips across town are cheaper too, and consumers are taking full advantage of this. And that is before this fall has had a chance to fully flow down to gasoline; expect to see prices at the pump even lower than they are today.

The bottom line is that this again hammers in diversification and rebalancing.  When one sector falls, others tend to rise due to the same conditions that caused the former to fall.  So, stay the course, rebalance as necessary, and control the things that you can control: saving and spending.

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