The impact from the plunging price of crude oil is sending shockwaves across the globe. Nations dependent on oil production, like Russia, Venezuela and Saudi Arabia, have witnessed plummeting revenue that is pushing some to the brink of recession.
At the same time oil consumers, like American drivers, are rejoicing thanks to the saving being enjoyed at the pump. However, for many those savings at the pump are being wiped out as retirement and investment accounts are taking a hit from the big blow oil stocks have taken over the past few months. So far, downturn in the oil market has cost investors $393 billion in wealth, according to a report by Bloomberg, which is far above the $14 billion American drivers saved at the pump last year.
Pumping in cash
According to Bloomberg, over the past five years, investors have pumped $1.4 trillion in cash into the oil and gas industry. These investments have helped push U.S. oil production up to levels we haven't seen in three decades. As the following chart notes, the rise in production has been absolutely remarkable.
By pumping out more oil than we have in decades, America has largely displaced much of its need for OPEC's oil. However, that hasn't stopped OPEC from keeping the pumps running. As we see on this next chart, America went from using 21% of OPEC's oil to less than 8% of its daily output in just the past few years, while OPEC has increased its output of the black stuff.
It had been assumed that the excess would just make its way to China, or other Asian nations, which had a nearly unquenchable thirst for oil. However, that hasn't happened as quickly as expected, which is why oil prices have plummeted 64% from the peak, as the world has more oil that it can use at the moment.
That plunge in oil prices has hit U.S. oil stocks hard, taking a big chunk of investors' portfolios with it. According to Bloomberg's data, investors have lost $393 billion since June, with $353 billion of that loss stemming from investments in the stocks of the top 76 companies in its Bloomberg Intelligence North America Exploration and Production index. While nearly all oil stocks have felt the pain, drillers with high debt loads have really burned investors, as bankruptcy fears are beginning to emerge.
This has affected bond investors who have seen nearly $40 billion deflate out of the value of high-yield energy bonds. These bond losses could grow much worse over time, as there is a growing worry of a massive energy bond default wave over the next year should oil prices remain weak. This is because the industry borrowed $786 billion over the last five years to fund drilling and acquisitions that were made under the assumption that relatively high oil prices would persist. With that assumption now blown to pieces, investors have no idea what will happen next, and some are running for the hills before waiting to find out.
Until oil prices bottom energy investors are likely going to see more value deflate out of energy stocks and bonds. This suggests the worst might not be over for investors, as oil demand has yet to respond in earnest to low oil prices. Meanwhile, it will take a while for oil supplies to drain out of the market. That being said, the oil market has a history of booms, busts and recoveries so at some point it will muddle through the mess it created by using debt to pump too much oil into the market. When that happens, oil stocks could very well return the $393 billion it has taken from investors over the past few months.