Oil Patch Economy

It seems as if some dude or group of dudes going to guns against innocents is part of the white noise of our culture. And, it doesn’t seem to matter whether they’ve allowed themselves to be radicalized by weird forms of religious extremism, have brains muddled by drugs, legal or otherwise, or are mad at their dad.

How do we come to grips with the fact that we can move beyond being victims? That we can let go of anger? That the past doesn’t equal the future? That we are neither random nor accidents?

The spot price of WTI, or West Texas Intermediate crude, closed at $41.71 last Friday, just above its 52 week low of $39.97, and substantially below its 52 week high of $74.05.

The oil patch economy was booming in the mid to late ‘70’s, as the price of a barrel of oil increased from $9 in late 1973 to more than $37 in late 1979. On an inflation adjusted basis, this equates to a range of from $44 to $107.

During this time, there was a home building boom across Texas, Oklahoma, Louisiana, and other parts of the oil patch. The homebuilders were busy, and just about every state trooper and football coach was building homes on the side, to pick up a few extra dollars.

The price of oil dropped by almost half from early 1980 through late 1984, and then fell off a cliff following the tax law changes wrought by the Tax Reform Act of 1986, known as TRA ’86. The average price of a barrel of oil in 1986 was just over $14, or $31 on an inflation adjusted basis. It wasn’t until 2003 that the price started a material climb, with the annual average price peaking in 2013 at $92.

The price of oil will rebound, though supply/demand suggests that it will likely not reach former price levels. Note that this last sentence is pure speculation, and should be treated as such. Personally, I believe the worldwide demand for natural gas will grow much faster than the demand for oil, and likely represents a better opportunity.

Speaking of oil, according to the Wall Street Journal, the oil patch worldwide has 250,000 fewer employees than it did a year ago, and the number of rigs operating in the U.S. is down by 60%. American production through August is down 3% from its April peak.

In economic news, the CPI was up 0.2% in October, after falling the previous two months, and the Producer Price Index was down 0.4%. Prices for top-line CPI are up just 0.1% over the last year and core CPI, which excludes food and energy costs, is up 1.9%.

Foreign investors sent $33.6 billion to the U.S. in October, with cash flows from foreign investors being positive in 12 of the last 14 months. The bulk of that money has gone to U.S. Treasuries and corporate bonds, with some going to real estate.

ECB President Draghi said the bank would continue its quantitative easing beyond October 2016, which would further weaken the Euro. Many believe the FOMC will raise interest rates when they meet next week. We remain unconvinced of such.

Treasury Secretary Lew announced that the federal budget deficit for the year ended September 30, 2014 was $483 billion. If interest rates were normalized, meaning Treasuries were paying more like 3%, the interest on federal debt would have been close to $600 billion, and the deficit for the year in question would have been in the $1 trillion range.

Medal of Honor recipient Captain Ed Freeman died in August 2008, after serving in WWII, Korea, and Vietnam. He is best known for bringing supplies to and rescuing troops from a firefight in Vietnam, after Medivac helicopters had been ordered to stop coming in. You can read more here, which is the website of the Combat Helicopter Pilots Association.

Speaking of veterans, Georgia State Representative John Yates is the last WWII veteran to serve in the Georgia legislature. Yates, who was 94 on Thanksgiving Day, can often be found giving history lessons to student groups touring the building. Sometimes, these “history lessons” include a tour of his office, which is packed with framed war medals, honoring resolutions, and personal photos of an airplane and a young Army officer.

Quote of the week:

“As we express our gratitude, we must never forget that the highest appreciation is not to utter words, but to live by them.” – John F. Kennedy


Randy Brunson
Randy Brunson is the founding shareholder of Centurion Advisory Group. Mr. Brunson
has invested most of his thirty five year career in the area of financial services.

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