Drivers are happy but the result may be lower capital investment.
21 Nov, 2018FORTUNE.COM
Just last week it looked like oil prices were recovering from a slide. Not anymore. And while that make may drivers happy with lower costs at the gas pump, the overall economy may fare worse.
Yesterday saw the lowest crude prices this year. And while things have recovered slightly today, traders are nervous because the immediate future is cloudy. Production is at a high in the U.S., currently the world’s largest source.
Output in Libya has been up and Venezuelan production has remained steady despite domestic instabilities, the New York Times reported. Add in the ongoing trade war between the U.S. and China driving slower economies and a corresponding reduction in demand and prices fall.
Lower resulting gas prices have left more money in the pockets of consumers, which should be a boost to the economy. But there may be a bigger overall drag because of ongoing U.S. investment in shale oil equipment, as MarketWatch reported.
Shale oil is the reason the U.S. has hit the top of global oil production. But the oil can be costly to produce compared to other sources. When prices drop too low, pulling more out of the ground becomes uneconomical. Producers can’t sell it for enough to cover their costs and make a profit.
That will mean a reduction in capital expenditures, which means a lower contribution to GDP.
Oil may still take an upturn in the near future. OPEC members may decide to reduce their production to force more use of reserves, pushing prices up. And Russian President Vladimir Putin may meet Saudi Crown Prince Mohammed bin Salman at the G20 summit in Venezuela at the end of the month, Reuters reported. A likely topic of conversation could be oil production restrictions.