OPEC determined to crush most of the U.S. energy sector

OPEC, led by our so-called “allies” the Saudi Arabians, ended its December meeting earlier this month with no determination on production cuts or even an output ceiling, which has dropped energy prices to their lowest level in 11 years.

The simple fact is OPEC wants to cripple the U.S. oil business and is willing to do whatever it takes to bring U.S. energy independence to its knees. And this last meeting confirmed this.

If we are to paint any lipstick on this pig, we would say that it’s good news for consumers because energy prices will be low in the winter season.

It also means that the U.S. doesn’t have to pump its reserves and can consume foreign oil while protecting our own assets for the long term.

But reality doesn’t work this way. By that logic, building cars outside the U.S. would save the U.S. its manufacturing potential while other countries benefit now.

This is bad news for the U.S. energy sector and the U.S. economy in general.

Granted, it’s hard to get mad at sub-$2 gas prices but this kind of market manipulation eventually will hurt the average American.

If you’re employed in the energy sector, your job is in jeopardy. Oil and natural gas jobs had been some of the fastest-growing job sectors in the U.S. since 2008. Energy service jobs grew by half and extraction jobs grew by 40 percent through 2013, according to the Bureau of Labor Statistics. No longer.

Now not only are wells closing; but because of the weakness in industrial metals, mines are closing as well. There were 104,000 fewer mining jobs in 2015 than in 2014. Oil and gas employment peaked last year at about 202,000 jobs; it now sits at 191,000. And that doesn’t include the jobs dependent upon the industry.

Also, when prices get hit, it also affects downstream operators (service stations, propane firms, etc.). Fuel companies run on margins. And if your margins are lower, you don’t expand your business and may even cut staff to save money. For example, a propane company may cut its “expensive” veteran workforce and hire cheaper, less qualified drivers. Shifting the workforce is made necessary by the economic conditions, not the skills of the workers.

The energy sector doesn’t end at the wellhead. It ends at your stove or your car. And this is going to have serious repercussions across the economy.

Ultimately, we will likely see the major firms come in and buy the small, weak firms — a game that plays itself out in almost every market. But consolidation will not happen until there is a bottom put into this energy game.

As an investor, your best bet, if you want to bottom fish in energy, is to go with midstream companies like pipeline companies. They’re essentially toll collectors. As long consumption remains strong, they will weather this storm; and they’re kicking off huge dividends now. Refiners should do well, too; but they’re a bit expensive now.

And if the weather in the Northeast gets cold, utilities should start rallying. Big utilities are a solid bet here. They’ve been beaten down; they have attractive yields; and they are in a growth sector that has very high barriers to entry.

–GS Early

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