These companies, by virtue of their stock prices, are clearly suffering in the short-term due to the price of oil. In order for these companies to be in true trouble, it will take oil prices stagnating at these levels for, at least, a few quarters.  The oil drillers are not going to be changing their production models significantly for one quarter of what equates to a market shock. It would take a real prolonged period of prices holding at their current levels to cause much change in the oil drillers’ behavior, lowering production and fomenting consolidation. It is that kind of industry long-term sea change that will depress the oil services sector’s prospects.

Renewable Fuels

The renewable fuel sector, comprised of ethanol and other biomass based fuels, is largely based on the relationship of the cost of ethanol versus the cost of wholesale gasoline. The viability of renewable energy sources derives primarily from being a cheaper alternative to costly gasoline. At the point at which ethanol is more expensive than wholesale gasoline, it is no longer a viable alternative. In the last four years, gasoline has only been more cost-effective than renewable fuels for seven weeks. As such, much infrastructure has been put in place to allow for greater usage of renewables. With oil prices where they currently stand, gasoline is currently cheaper, cutting margins across the renewable fuel segment.

In the short term, these prices are putting a strain on producers of renewable fuels, as customers seek to switch back to traditional oil and gasoline. In the long-term, these effects could be lessened through government regulation and the continued environmental benefits of renewable fuel sources. As long as the EPA continues the federal ethanol mandate, ethanol producers are buoyed by a mandate that ensures 10% ethanol as an additive to all gasolines. There are also huge public perception benefits to increased use of biomass fuels, both from an energy independence standpoint and as part of the greater “clean energy debate.” If the economic costs to renewables continue to be too great, those benefits could be minimized in the push for long-term profitability.

Financial Services

Cheap oil will paint the cloudiest picture for those of us in the financial services sector. In managing portfolios, it could become increasingly difficult to determine the distressed assets from the healthy. After all, if profits hit record levels in the short term due to the pricing, multiples will too swing out of logic. A distressed company could find itself able to leverage itself further, or find extra cash on the balance sheet to forbear a need to restructure.

On the other hand, it is easy to imagine an otherwise healthy business running on tight margins that will be so adversely affected by the drop in prices that it will go under shortly after the New Year. What happens when margins disappear overnight and oil prices hang below $70 a barrel? These prices could bring forth a rash of new filings if prices refuse to rebound.

Conclusion

The recent precipitous decline and current price of oil have already sent shockwaves through the economy. When these prices will rebound is difficult to predict, due to the geopolitical basis for their fall. The short-term effects are greatly helping the long-struggling retail and transportation sectors. The longer these prices stay depressed, the greater the changes to the renewable fuel and oil services sectors will be. What is certain, however, is that those in the financial services sector must understand these changes and prepare their portfolios for the uncertainty of such historically low prices.