tv Nightly Business Report PBS January 19, 2015 7:00pm-7:31pm EST
this is "nightly business report" with tyler mathisen and sue herera. good evening everyone and welcome to this special edition of "nightly business report." i'm tyler mathisen. >> and i'm sue herera. the first weeks of 2015 started where 2014 left off with a focus on energy. both west texas intermediate and brent crude have continued their dramatic decline and forecasts calling for prices to fall further. >> the reason it's simple the world is producing more oil than it is using. tonight, we examine why declining oil prices matter so much to investors, to consumers, the economy, states from texas to north dakota and even the housing market. >> we begin with the economy. at this time last year oil was trading well above $100 a barrel. this month?
a barrel at west texas intermediate dipped below 50. so how will this dramatic collapse in energy costs impact the economy and consumers? steve liesman takes a look. >> reporter: plunging oil prices raised a few economic puzzles. first, since the u.s. is now such a huge oil producer wouldn't it be a drag on the economy or a benefit? this is key to the first, what will consumers do with the wind fall? save spend, or pay down debt? disappointing retail sales in december suggest consumers parting only reluctantly with the extra petro dollars in their pocket. >> people are waiting to see if this is real and take a while before adjusting their spending pattern. >> reporter: to be sure the case is not closed. consumer spending was strong in october and november leaving some economists to forecast that fourth quarter growth will sport the best consumer spending number since the great recession ended. the december data may yet be revised and just because
consumers took a break doesn't mean that the oil wind fall won't find its way into mall cash registers in january and beyond. >> i think it's a blip in an otherwise strong trend for the consumer because look at the consumer backdrop. healthy job growth increase in does posable income savings from the drop in gasoline prices lower interest rates, wealth depreciation and consumer sentiment is improving. >> reporter: let's go back to the first question. is the plunge in oil good or bad? right now, stock markets only see the negative. plunging oil profits and oil stock prices. soon enough, capital spending could take a hit while drilling new wells and the uncertainty. are oil down because demand and growth weak worldwide? it's consumer why the consumer is key. spending should be the key but so far it's not. the rule of thumb, every $10 a barrel decline in oil means an extra quarter point to growth. but right now, the rule is being
challenged as are the optimists who see lower oil prices as a positive for the u.s. economy but are still waiting for proof. for "nightly business report," i'm steve liesman. >> for now, cheap crude means more growth for consumers. some wonder how low is too low for oil. it is a delicate balance and there could be a point where the drag on the economy outweighs the pickup in consumer spending. jackie deangelis explains. >> reporter: the crude crash continues with no end in sight. prices on both sides of the atlantic now under $50 a barrel. while cheap crude means consumers could save 50$50 billion to $75 billion on gas, how low is too low? the drag outweighs the pickup for the consumer spending. >> we're in the beginning part of the price zone right now that hurts production in a big way and starts to reverberate
through the economy, the manufacturing economy especially. it will be particularly painful if we do break the $40 level and if we break the $33 level, my low price target and we go down into the 20s, then it's going to be a real bleak situation. >> reporter: production is just one risk if oil falls too low. the ripple effect is pulling back on hiring and laying off workers. in theory 1.58 million jobs could be at stake if crude collapses to $20 or lower. there's also a global impact. lower oil prices don't just hurt the u.s. they could hurt canada russia venezuela and brazil to name a few. the fallout from this could trigger a global financial crisis. how long will we stay there? goldman sachs adjusting 2015 price forecast to $47 a barrel and staying we could stay to $45
until the fourth quarter of the year. >> i agree with goldman sachs forecast. when you look at the supply demand it is skewed to the supply side and i don't think it will change before summer. i expect prices to be low going into the summer. >> reporter: while supply is key, so is demand and neither are seen changing anytime soon. for "nightly business report," i'm jackie deangelis. >> and john kilduff joining us now with outlook for energy and oil prices. we heard in jackie's piece you were looking at $33 a barrel. last time we saw that was the financial crisis. what's going to drive it to $33 or close to it? >> that's precisely where i get the number from. oil prices rally from that number to $100 or plus the past few years. the basic look at the chart falling down that should be the low point for it and it's just all this intense selling going on not just in crude oil but the commodity sector generally, everything from live cattle to
copper to coal and iron but that should be the landing point for crude. that's what gets some of the technical buyers back in the market to make the bottom finally stick here. >> you mentioned $33 was where it settled during the financial crisis. at that time the oil price was a consequence of something else of the financial crisis. some people are saying and jackie just did in the piece that this time if we go to $33 or break below that it could precipitate a financial crisis. do you agree with that and what is the transmission mechanism, how did that happen? >> just like in the financial crisis when all the mortgages went bad and seemingly everybody participated from individual homeowners to the big bank to the big insurance companies because they all took a bet or made a bet on mortgages, housing, and playing out correctly, i don't see this as that systemic but the fear is that you're going to have a lot of junk debt implode and have a lot of these marginal companies go bankrupt. once again, the bank's holding
the bag. >> little companies borrowed heavily. >> that's right. but only 20% of the junk bond market. that's the fear. i don't think it's enough. it's close. but i don't think there's a knock-on or the derivatives part of the mortgage situation that are here. you don't have people taking side bets on the bets in that market. >> bundled. >> exactly. it's not as systemic. it's not as big. i don't think it's big enough to take us all down, but it will leave a mark. >> what about the destabilizing effect globally? you look at russia which is suffering economically. mr. putin seems well ensconced there right now but if we do see $33 a barrel oil. >> i think that's the scariest part of this whole story. destabilizing in particular for russia and venezuela, venezuela just about broke now as it is. and i'm not sure if putin survives to the end of this year even if the russian economy
imploeds over this which is very likely to do. they're hocking the crown jewels closing their sovereign wealth fund to prop up the ruble and see the owner of the new york nets selling to help the cause and repatereate. and the middle east not just saudi arabia and iraqs of the world, but prop them up as well. >> that's an interesting point. i was thinking earlier, falling oil prices has a bigger effect now than it would have had on the u.s. economy because we are now a big major producer of oil again. but we have a diversified economy. so with those economies, not. the middle eastern economies, russia kazakhstan and others. >> there's one trick ponies classic mineral resource boom bust economies when the prices do end bust and revolution we don't have the track to
particularly favor u.s. interest or western interest anymore. so i think that's a worry. but you're right, tyler. that's another thing too about this. i think the worry about the job loss in the u.s. drilling sector and it's overblown as well. the job numbers i have are only several hundred thousand good paying jobs don't get me wrong but not enough to take us down there. there's too many service jobs, jobs that have been part of this recovery that have gotten us to where we are with the gdp numbers. it's going to hurt with a mark but not taking us down. >> we'll have you back later in the program with acquisition in the sector. thank you very much. still ahead from deep in the heart of texas, all the way up to north dakota some of the cities in the heart of america's energy boom are faring as prices head south.
it was hailed as an oil boom for the first time in decades. the united states was increasing production dramatically and certain parts of the country were reaping the rewards from texas all the way up to north dakota local economies firing on all cylinders but the prices plummeting there is now concern that fortunes could change. brian sullivan went to midland texas, willis north dakota and houston and canada calgary, to see the impact of oil's plunge. >> reporter: with oil prices continuing to fall the oil industry here in texas is starting to feel some strain. and there's perhaps no place in the state that feels it as much as the city of midland.
for the past few years, midland has been one of the fastest growing cities in the state and also has one of the highest average incomes of anyplace in america. increased improvements in drilling technology and controversial practice of fracking set off a wave of investment in the west texas town for the past few years. in every direction here there are new companies, new construction. building after building after oil rig, operators, drillers service companies and everything else that is attached to the permian base in oil surge. the permian boom sustains more than 400,000 jobs and more than 100 billion in total economic output. we asked long time oil man and resident paul ken worthy if it is all at risk. >> certainly not going to go away entirely but from some of the equipment stacked in here it's going to slow down. so the extent of the slowdown remains to be seen. >> reporter: but texas has seen
this movie before. in the past two or three decades, there have been a number of oil boom and bust cycles in the state and those in the oil business do remain optimistic. >> we're only about 1% oversupplied so that will be corrected fairly quickly, i think, during 2015 and early 2016 and then be more of an equilibrium. >> reporter: the bigger older players have much lower cost of production many of the newer companies, maybe $50, $60, even $70 a barrel to remain profitable. many residents in midland want to see how low they're at these levels. people in willis ton, north dakota hope they don't become the center of a bocking bust. in the western edge of north dakota has been one of the greatest economic success stories of the past decade. as oil prices rose production
rose. from 165,000 to more than 1 million barrels per day in just five years. with that surge came jobs. high paying ones. oil field workers and truck drivers can earn more than $100,000 per year. help wanted signs are everywhere. there's more jobs th people to fill them but people have incomecome all over the world and some bring everything in their car and some sleeping in their car because housing is so expensive. they have little in common except looking to cash in on the american dream. >> two years. i think about 1400 rooms across two or three. about 7 or 8 hotels planned. >> reporter: producing oil here is expensive though. the ground is hard. drilling takes more work. most analysts put the average cost to bring a barrel of oil out of the ground at around $70 a barrel. and with oil's recent collapse in price below that level,
people here while still confident, are looking ahead. >> plans are being made this year. and i don't see a slowdown. there's a lot of infrastructure put in place. there's a lot more wells still to be drilled. >> reporter: most agree these prices won't stop the boom at all once. the companies here are more efficient than others and can withstand the lower prices at least for now but is the real threat to the newer higher cost producers? many may need oil prices above $80 a barrel to keep justifying the ratesing running. if prices stay at this a few months boom could come to a halt as quickly as it started. here in canada oil's price collapse is front page news. and while consumers love the drop in the price of gasoline the oil producers and the canadian government do not. rapidly falling oil prices hit everything from government budgets to infrastructure building to the canadian dollar
and jobs. massive canadian company seon corp. announced it will lay off 1,000 workers cutting a billion dollars from capital spending plan. it's enough that high ranking government officials speak up about it. >> oil prices continue to slip. we don't evidently have seen the bottom yet and this is opened up an enormous revenue short fall in terms of the government's budget. quantified for next year as $6 billion to $7 billion. $5 billion the year after that. if we don't take action. >> reporter: though finding an answer to the growing crisis is complex, the cause of the problem is not. the world is simply producing more oil than it is using. so is supply and demand so out of whack, we asked an oil economist why don't the big oil producers simply cut back on production? >> when you've got a price war, all producers try to offset the
revenue loss by producing more so it's a free for all for the moment but, you know, until we start to see some of the participants in the global thing start to die off, we're going to see low prices. >> reporter: canada's oil pain is not just a canada story. stocks in more than 70 major canadian companies trade in the united states. a number of those are oil companies. and they have been walloped. shares of bay tech's energy penn west petroleum and precision drilling seen shares fall by 50% or 60% in just a matter of months. some call calgary the houston of canada because of strong job market and fast growth but much of that is tied to the price of oil and if oil's price were to fallow lower or stay at this level, the building boom you see behind us may run out of gas. i'm brian sullivan in alberta, canada. >> it's not just energy and oil
companies feeling the pinch of oil prices. as morgan brennan reports, the ripple effect is spreading into other sectors. >> reporter: the collapse in oil prices is beginning to take a toll on other industries. the united states steel corporation is temporarily idling two factories and laying off roughly 750 workers, a direct result of crude's dramatic plunge. supplying tubes and pipes to oil and gas drillers is a key market for steel makers and up until now has been a bright spot for the hard hit industry. but with energy companies expected to slash capital spending by as much as 20% this year that means less steel. >> u.s. direct steel consumption into the energy market is about 10% of the market but when you include energy-related infrastructure that number bumps up to about 15%. so the weaker growth in oil and gas is really driving down the growth rate of u.s. steel consumption this year. >> reporter: factor in a stronger dollar expected supply doesn't look good for the commodity in 2015 but isn't
alone. other industrial companies also beginning to feel oil's effects. general electric recently said it expects revenue from oil and gas segments to fall this year. g.e.'s business which makes kpes soars and drilling equipment was 20% of the 2013's sales with billions of dollars to expand that and after a year of stellar growth experts watch railroad operators as well. >> because we see the potential for these lower crude prices to persist for a period of time in 2015. you could see some production drops. you could see some of the volumes come down. >> reporter: however, whether we don't know oil and related fracking supplies make up a tenth of overall rail volumes. analysts say the caterpillar, laying off weakness in mining could come under pressure from exposure to oil and gas. and archer daniel midland could feel the pinch as export demand waens.
but every company hurt by oil downturn many others benefitting. airline carriers realizing cheaper fuel costs and retailers in theory could see a boost as consumers spend more on things other than gasoline. for "nightly business report," i'm morgan brennan. >> the drop in oil could be a driver of merger and acquisition activity in the energy sector this year as corporate profits come under pressure and valuations fall, some companies could look to take over targets. john kilduff, back again. >> a little popcorn. >> so as these stock prices go down for some of these companies, you've got to figure other bigger whales out there might want to buy some of them. who and which? >> well obviously, as you saw from brian's report there earlier, these companies, their stocks have gotten crushed. the prices knocking on debt's door already when you forecast
out the prices. so the acquired targets. the targets that should be buyed out by other companies. should be in a position to be picking up the leftovers here or the dead bodies of this carnage coming. but companies then the small ones from continental resources on down mobile regency partners eqt and companies like those that are going to be struggling are to take over candidates. they've already been hammered. i'm not saying to go rushing into these names right now but certainly, that's the model for what's going to happen and we saw this already as some see the writing on the wall. >> investors may be licking these. >> and that will help them survive. you saw this with white
petroleum in the kodiak merger back in december using what's left of their stock to come together and try to make something bigger than some of the parts. >> it's also there's big players in this mix as well and you point to bp which might be doing a deal with shell or another company. why would they need to do that? >> and bp has already been struggling. obviously, the problems with the mccondo oil well. everything they'll have to pay. they've been cutting back on people buybacks. the blood is in the water there. >> they're in play. >> they really are. there's already been rumors about shell and exxon mobile looking hard at them and that would be a megamerger. one of the seven sisters being brought in. i think to me that's the most delicious looking takeover targ of this whole sector. can't go too wrong with bp because it's a well run company despite their struggles and so beaten down. i think that's my favorite one right now to say, hey. >> there could be a merger on
the scale, not necessarily quite the same scale of exxon mobile chevron texaco. >> not just the little guys. there's two companies traditionally integrated where they got oil out of the ground refined and sold it like a marathon. hess. they've been forced by activists to split up and just focus on exploration and production with the falling price, they need to expand their portfolios. they'll have money to burn and go to the smaller names struggling right now. >> people say refinance the debt because interest rates are so low but if it's linked to falling oil prices there's nobody to do that deal. >> right. to bring it home to main street they don't have the fico score to refinance. >> that's a good way to put it. >> yeah they really don't. >> if i were to go out and buy companies on the idea some might be taken over apart from naming names which you did earlier,
you'd look for what? >> you'd want to look for companies that have a decent amount of leverage that have a decent stock capitalization either use the stock to join up with somebody or have been so beaten down that it's just easy for an exxon mobile or one of the bigger -- apache to snatch them up. at this point, a nice preemupmiumpremium. not too happy about it. the ones beaten down 60% or 80%, not buying them to be turned around but to be bought out. >> john, thank you very much. coming up the spillover effect and what the falling price of oil could mean for the housin
cheaper gas may be just what the housing market needs to help fuel sales this year. but the majority of those sales could be concentrated in just certain parts of the country. leaving some cities high and dry. diana olick explains. >> reporter: rows of town homes rising in rockville, maryland. it may be cold in this d.c. suburb but sales are heating up and lower gasoline prices could be fueling the surge. >> people are feeling far more comfortable with that extra money in their pocketbook. and yes, our traffic has been very high and sales are quite good especially during the typically slow december season. >> reporter: but how much extra money is it really? rammed the numbers and with gas prices down 23%, that adds about
$100 in monthly income for the average american. and that translates to an 11% boost in purchasing power on a starter home. not to mention mortgage rates have fallen in response to lower oil prices. >> for most americans, it's a huge tax break. >> reporter: ceo richard dew ga is not concerned about his company's large footprint in energy heavy texas. >> we are one of the most builders with big holdings in the southeast, midwest, frankly, the west coast. i think whatever impact we may see and again, i'm not counting on demand from oil, i think you'll see offset frankly by buyers elsewhere. >> reporter: elsewhere though will not be the far out. builders are sticking to the suburbs. the low gas prices are not enough to reverse the migration to the city. builders will stick to where the demand is and hope that more potential buyers will take their gas savings and spend it on a
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