Yesterday I wrote about the recent Goldman report speculating that oil might fall to $20 a barrel.

What would this mean for stocks?

a $40 ceiling…

To my mind, the most important observation is the simplest–the potential price fall would be caused by more oil being supplied than the world wants or needs or is able to store profitably for future use.  The price would decline to force marginal production off the market.

In other words, there’s significant oversupply at $40 a barrel.  Therefore, $40 becomes the new ceiling for oil, which would presumably bounce between it and the floor of $20.  The $60-$70 a barrel level, which markets now believe to be the near-term price ceiling, becomes a pipe dream.

…that would be hard to break through

Yes, demand for oil has been showing a trend rise of about 1% per year, and a lower price will encourage higher use but since the extent of oversupply is hard to know for sure, the safest assumption, I think, is that it would take a looong time to break through the $40 ceiling.

substitutes are hurt

A lower oil price makes substitute forms of energy–from coal and natural gas to nuclear to wind and solar–relatively less attractive.  In the US, we’ve already seen demand for automobiles is shifting away from fuel efficiency to gas guzzling because of $40 a barrel oil.  This trend to would likely accelerate if oil falls more.  Of course, by spurring more profligate use of oil, this trend should sow the seeds for future oil price increases.  Still, my guess is that upward price pressure takes a long time to develop.

producers vs. consumers

countries

Lower prices would be a boon for oil-consuming nations.  For developing countries dependent on oil production for economic growth, however, lower prices would force significant–and possibly very politically messy–structural change.  We’re already seeing this in Saudi Arabia, for instance.

industries (in the US)

Financially strapped oil producers would be in worse trouble than they are now.  Bad, too, for oil-related junk bonds.  The same for regional lenders specializing in oil and gas loans.

Seen from 30,000 feet, the US is a complex economic case.  Shale oil has allowed the country to displace Saudi Arabia as the #1 oil producer in the world.  On the other hand, the US is nevertheless a huge importer of foreign oil (per capita, we use twice as much oil as anyone else on earth).  While oil-producing regions–Alaska, Texas, Oklahoma, North Dakota…–would suffer from lower oil prices, the rest of the country would have its already low oil bills cut in half.

stocks

the minus column

oil producers

producers of other forms of energy

companies located in oil-producing regions

the plus side

US auto firms

oil refiners

transport companies, like airlines and truckers

consumer companies, helped by the boost to disposable income from less spent on petroleum products

??strip malls, Wal-Mart, resort destinations, other firms consumers typically drive to

businesses serving less affluent customers, who would have the greatest percentage boost to disposable income