The latest plunge in oil prices is putting a smile on the faces of millions of Americans. But should it?
Sure, the stunning crash in oil prices below $27 a barrel seems great for consumers because it’s driven gas at the pump to nearly $1 a gallon in some places. And the thinking is that it should help boost the U.S. economy, with people spending their gas savings.
But cheap oil is also causing mayhem in global stock markets. The financial headlines at the start of 2016 are downright scary. With that backdrop, any euphoria over low oil prices is questionable. Here’s why:
It’s rocking your retirement account: The Dow has plummeted 1,800 points so far this year and CNNMoney’s Fear & Greed Index is flashing “extreme fear.” You’re not going to be happy when you open your 401(k) statement. The freakout on Wall Street has been largely driven by the crash in oil. It’s caused energy profits to plunge and slammed stocks like Chevron (CVX) and ConocoPhillips (COP).
Oil companies are dying: The U.S. energy boom was fueled by expensive drilling technology that was designed for far higher oil prices and paid for with lots of debt. Those loans are now much harder to pay off. Oil and natural gas bankruptcies spiked 379% last year, according to consulting firm Gavin/Solmonese. Many more are expected to succumb to financial trouble in the coming months.
Big banks are bracing for losses: It’s never a good sign when the country’s financial lifelines are under stress. Large U.S. banks JPMorgan Chase (JPM) and Wells Fargo (WFC) that helped bankroll the energy boom are already setting aside billions to cover potential loan losses in the oil industry. Investors are worried about imploding energy loans for European banks like Deutsche Bank (DB). High yield bonds in your investing portfolio wont be looking good either — Standard & Poor’s warned that half of all energy junk bonds are at risk of defaulting.