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Energy prices collapse: The good, the bad and the ugly

Aaron Task
Editor in Chief

Oil prices tumbled again Monday, hitting their lowest levels since 2009, while average U.S. gasoline prices are now at the lowest levels in four years, according to the Lundberg survey.

The steep fall in energy prices is either great or terrible news, depending on your perspective, i.e. whether you're a bull or a bear.

If you're a bull, the positive implications of falling oil prices are obvious: More money in consumers' pockets and relief for troubled global economies, most notably in Europe and Japan. The effect of falling oil prices is "unambiguously positive,” European Central Bank president Mario Draghi declared last week. Similarly, officials at the IMF and Federal Reserve are also "betting plummeting oil prices will lead to an overall boost in the global economy by delivering a windfall to consumers and manufacturers," The WSJ reports.

Along with overall economic improvements -- Friday's jobs report was the best since January 2012 -- the steep decline in gasoline prices is a big reason why retail stocks such as Target, Costco and Starbucks have risen so sharply in recent months.

On the flip side, energy shares have taken a shellacking and companies like Continental Resources and ConocoPhillips have already announced plans to cut back on capital expenditures in 2015. On Monday, BP announced it will accelerate previously planned job cuts citing the decline in crude prices; the company employs about 20,000 people in America, mostly in Texas.

As much as $100 billion in related capital spending is at risk due to falling oil prices, according to The FT. If drilling activity stops (or even just slows) that will come at a cost to the thousands of Americans working in the energy sector, where average pay is 23% higher than the average private sector job, according to BTIG. In addition, less drilling will hurt all the non-energy businesses that have benefited from the fracking revolution. Overall, fracking adds $300 billion to $400 billion annually to U.S. economic activity, according to the Manhattan Institute.

The decline in economic activity from less domestic drilling will almost certainly be offset by the boost U.S. consumers will get as a result of falling energy prices. Assuming Brent crude averages $80 per barrel (it's currently at $67.30) the average American household would save $600 annually, according to estimates from Citibank.

However, the downside of geopolitical risk could very easily and quickly offset the benefits the global economy will enjoy from lower oil prices, as I wrote last week.

In addition, the speed and depths of oil's decline could be harbinger of an "accident" in the financial markets, even a so-called Black Swan event.

"While I’m certain over the long run the lower price is a net benefit to the world, the staggering speed with which it has fallen is destroying debt and equity values throughout the energy sector," writes Belpointe chief strategist David Nelson. "My crystal ball isn’t any clearer than yours but if there’s a Black Swan lurking you’ll probably spot it floating near some oil rig."

While oil prices and related stocks get most of the attention, Nelson notes energy accounts for about 16% of the high yield bond market and that banks have lent $465 billion to oil and gas companies in 2014, according to Thomson Reuters LPC; that's up 29% from the previous record set in 2007.  

2007 was, of course, followed by the financial crisis of 2008. I'm always wary of allusions to 2008 because it hopefully was a "once-in-a-lifetime"-type event that nobody sane wants to revisit.

But "historically, sharp drops in oil prices tend to be associated with recessions as energy demand collapses," The WSJ notes in the story cited above.

And somewhat alarmingly, the same WSJ story quotes Guy Caruso, a former head of the U.S. Energy Information Administration, who declares "this time is different,"  which are, of course, the four most dangerous words on Wall Street.

Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.