Oil sector layoffs: All going according to plan?

by Lear Capital EditorialJanuary 21, 2015

If OPEC was trying to rattle our already shaky economic “recovery”  it seems to be working.

Not too long ago the energy sector and related stocks were carrying economic indicators, like the GDP, that purported to prove we were in a recovery, albeit a weak one. When you drilled down on the numbers, however, it was clear the economy was still in shambles and nothing the Federal Reserve was doing was improving the situation for the vast majority of working age Americans.

Oil was the one bright spot on which many pinned their hopes and investment dollars. Oil couldn’t lose, it seemed. Between government incentives for green energy and quantitative easing slushing money into higher yielding energy stocks, everyone was jumping on the oil bandwagon in some way. It seemed there was no other choice than to chase those nice energy returns to soften the losses from other sectors. It has felt for a long time in the financial world that energy is a kind of economic savior, much like housing was the salvation after the dotcom bust…

The mainstream financial media scoffed at the idea that housing could be in a bubble in 2006 and 2007. And then we learned the hard way that fundamentals really do matter.

And yet here we are again, all those valuable lessons gone to waste. The markets forgot so soon this time. You know what they say about those who forget the lessons of history…

The layoffs in energy are now coming fast and furious after just really two or three months of low gas and oil prices. Baker Hughes is laying off 7,000 workers and Schlumberger is laying off 9,000. Halliburton has also announced an unspecified number of layoffs. And there is more trouble ahead.

Some point out that the situation for key OPEC member Saudia Arabia is far, far worse. Their GDP will be massively impacted by the lower oil prices. Oil is pretty much all they have. But then, why do they refuse to cut production? Nouriel Roubini puts it this way:

“Their behavior is like a typical oligopoly using predatory pricing. If you keep prices low for long enough, you get rid of those who are high marginal-cost producers, whether it’s shale gas and oil, or Russia, or Venezuela, you name it. Secondly, you commit to your fixed investment schedule and continue to increase capacity. That’s going to lead to everybody else to underinvest in increasing capacity. In the short term, you have lower oil prices, but in the medium term you’ve flushed out your competition … you take the pain for the next 12 to 18 months, but the result is higher prices and market share down the road.”

If Roubini is correct, this is all going according to plan for the Saudis.

Meanwhile, gold seems to be off to the races, hitting its best 7-day run since 2007 and reaching back up into the $1300 an ounce range. But it’s more than the rattled energy markets that is driving the safe haven buying. Europe is a mess, with their own currency decimation underway. The Swiss decoupling from the Euro is one big sign that the smart money is moving away from the incredibly foolish policy of quantitative easing. It didn’t work in the US and it won’t work in Europe, but that won’t stop them from trying.

It’s a great idea to stake your position in precious metals right now if you haven’t already. If today’s trends continue, you will be glad you did.

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