The Oil Crisis Can Harm US Economy, But Not Like COVID-19

As oil prices turned negative recently, many climate activists argued that oil is practically begging to be left in the ground. But the Trump administration has the industry's back and will certainly not let it die. And if we put the green initiative aside, the oil and gas industry in the US alone carries 10.3 million jobs and contributes 8 percent to the country's GDP. This is most certainly not like  50 percent which is the case with Saudi Arabia, but it is big enough to impact the economy.

Glimpse of good news amid the turmoil

About 10 days ago, oil prices turned positive after Saudi Arabia's energy minister said the kingdom aims to provide additional voluntary cuts in an effort to support global markets, somewhat easing the tension which was exploding amid the Russia-Saudi conflict.

But keep in mind that global oil demand has plummeted by about 30% as the coronavirus pandemic curtailed movement across the world, building up inventories globally.

V, U or L-shaped recovery?

Goldman Sachs said earlier this week, as quoted by Business Insider, that oil demand is about to start recovering fast as in a V-shaped manner but it won't recover fully. Supply is expected with an L-shaped recovery due to less business travel resulting in significant long-term demand in jet fuel demand. Then there is the fact that shutting in oil wells does damage making it difficult to recover, along with a sharp decline in capital expenditure and limited access to capital as investors won't hear anything about oil.

Moreover, Goldman analysts warned that supply might never reach pre-crisis levels. As for the more optimistic forecast for demand, this full recovery isn't expected before the third quarter of 2022 so buckle up folks! The industry is bound to take a beating as Warren Buffett's Berkshire Hathaway sold its stakes in the "big four" airlines in April for a reason.

Even the mightiest have fallen

The debate regarding the government stepping in to help is that even with the aid, only the superstars such as ExxonMobil XOM will be able to make it through. But even the big oil giant was not spared by tumbling prices and oversupply as its shares crashed more than 50% over the last five years. And let's not forget it almost doubled its debt to $44 billion to make it through the last oil price downturn between 2014 and 2017, not too long ago and this has put a question mark on its ‘conservative' management that was the most common way of doing things. ExxonMobil is still poised to outspend its big peers with a total 2020 capital budget of $23 billion, modestly ahead of Royal Dutch Shell (NYSE: RDS-B)'s $20 billion with Chevron CVX and BP p.l.c BP quite modestly below with $14 billion and $12 billion respectively.

The oil crisis Vs COVID-19 – no contest

In all fairness, the harm that the oil turmoil could do the US economy is not that serious when looked against the backdrop of the global slump caused by the pandemic. COVID-19 is expected to result in an even worse blow both to US' GDP as well as to the global economy than the Great Recession. And its effect will be felt by literally everyone, no exceptions. The only way forward is looking at China, considering that both US and Europe perfectly imitated its way down so most likely will follow the same way out of this chaos as the world's second largest economy is starting to reopen.

This article is not a press release and is contributed by Ivana Popovic who is a verified independent journalist for IAMNewswire. It should not be construed as investment advice at any time please read the full disclosure . Ivana Popovic does not hold any position in the mentioned companies. Press Releases – If you are looking for full Press release distribution contact: press@iamnewswire.com Contributors – IAM Newswire accepts pitches. If you're interested in becoming an IAM journalist contact: contributors@iamnewswire.com Questions about this release can be send to ivana@iamnewswire.com

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